Futurum training capital budgeting (intermediate)
Date : see at the website “futurum corfinan” (2-day training)
Venue : Hotel at Jakarta Pusat
Notes :
Presentation slides will be distributed in softcopy
Minimum participants = 10 persons
After the training, participants are allowed to discuss about the training materials via email in the website
Contact email : futurumcorfinan@gmail.com
Visit Website and Training Testimonials : google “futurum corfinan”
2.
n
t
t
t
k
CF
INPV
1
0
)1(
BASICS OF CAPITAL BUDGETING
where I0 = initial cash outlay
CFt= net cash flow at t
k = cost of capital
n = investment horizon
n
t
t
t
k
CF
INPV
1
0
)1(
3. Project’s Cash Flows
(CFt)
Market
interest rates
Project’s
business risk
Market
risk aversion
Project’s
debt/equity capacity
Project’s risk-adjusted
cost of capital
(r)
The Big Picture:
The Net Present Value of a Project
NPV = + + ··· + − Initial cost
CF1 CF2 CFN
(1 + r )1
(1 + r)N(1 + r)2
4. YOUR MBA TEXTBOOKS TOLD YOU THAT:
Accept project if NPV > 0.
Reject project if NPV < 0.
Given the variables, calculation of
NPV is easy.
Is this that EASY?
7. WHAT THE HARD PART OF A CAPITAL
BUDGETING?
Question:
Why is a person who has learned about NPV like a baby
with a hammer?
Answer:
Because to a baby with a hammer, everything looks like
a nail.
A baby just hammers it down without thinking too
much.
8. WHERE DO THE POSITIVE NPVs COME
FROM?
Our point is that you should not focus on the
arithmetic of NPV and thereby ignore the forecasts
that are the basis of every investment decision.
Senior managers are continuously bombarded with requests
for funds for capital expenditures. All these requests
are supported with detailed Discounted Cash Flow analyses showing
that the projects have positive NPVs.
ARE PROJECTS PROPOSED BECAUSE THEY HAVE POSITIVE NPVS,
OR
DO THEY HAVE POSITIVE NPVS BECAUSE THEY ARE PROPOSED?
9. APPLYING THE NET PRESENT VALUE
Cash Flow is the Source of Value
• What is to Discount?
• Only cash flow is relevant
• Always estimate cash flows on
an incremental basis
• Be consistent in your treatment
of inflation
• Separating Investment and
Financing Decisions
Investment Timing
• The fact that a project has a
positive NPV does not mean
that it is best undertaken NOW.
It might be even more valuable
if undertaken in the future.
• How to analyze this? Use Real
Option, a simple illustration
10. APPLYING THE NET PRESENT VALUE
Equivalent Annual Cash Flows
• Choosing between Long- and
Short-Lived Equipment
• Equivalent Annual Cost and
Inflation
• Equivalent Annual Cost and
Technological Change
• Deciding When to Replace an
Existing Machine
Capital Budgeting Decisions and Loan
• Do you know that by taking the
loan to finance the capital
investment will change our
capital budgeting decisions? A
simple example
• Why is the loan valuable in
capital budgeting?
11. CAPITAL BUDGETING FOR LEVERED FIRM
• Levered and Unlevered firm : a
simple example
• The after-tax weighted-average
cost of capital to value a project
• Implementing a constant debt-
equity ratio
• Using WACC –some tricks of the
trade
• Adjusting WACC when debt
ratios or business risks change
• Adjusted Present Value method
for capital budgeting
• The Flow-to-Equity Method
• What counts as “Debt”?
• Project-based Costs of Capital
• Common mistake: Re-levering
the WACC
• APV with Other Leverage
Policies
• Discounting safe, nominal cash
flows
12.
13. TRAINING DESKTOP
Date : see at the website “futurum corfinan” (2-day training)
Venue : Hotel at Jakarta Pusat
Notes :
• Presentation slides will be distributed in softcopy
• Minimum participants = 10 persons
• After the training, participants are allowed to discuss about the training materials
via email in the website
Contact email : futurumcorfinan@gmail.com
Visit Website and Training Testimonials : google “futurum corfinan”
14. Train Your
Employees!
By now, we’ve probably all
heard the classic HR
executives’ exchange —
Colleague #1: “What if we
pay to train our people and
they leave?”
Colleague #2: “Right, but
what if we DON’T train them
and they NEVER leave?!?”
We can all agree that the
latter scenario is worse.
