Capital budgeting is the diligence process that a company performs to determine what investment projects it will undertake.
Application of these principles is relevant as an internal corporate finance analyst or as an external debt or equity analyst at a financial services company.
Theoretically, a company will only commence projects which are expected to increase the firm’s value.
Value of a capital project = present value of expected after tax cash flows, discounted at an appropriate risk adjusted rate.
Discount Rate: commonly the firm’s marginal weighted average cost of capital (WACC), however in certain circumstances it may be appropriate to revise WACC depending on a project’s increased or decreased exposure to market risk.
