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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Making Capital Investment Decisions

Learning Objectives

After studying this chapter in the textbook, you should be able to:

Explain the stand-alone principle and know why it is so important in capital budgeting.

Know which cash flows are relevant in making capital budgeting decisions.

Understand the importance of net working capital changes in capital budgeting decisions.

Compute project cash flows.

Understand and be able to compute the depreciation tax shield for a capital project.

Distinguish between the bottom-up, top-down and tax shield approaches when calculating operating cash flows.

Understand and incorporate the effects of salvage value in making capital budgeting decisions.

Differentiate between capital budgeting decisions that involve cost-cutting proposals and those that involve the replacement of assets.

Compute the NPV of a capital budgeting opportunity.

Compute the effective annual cost (EAC) and use it to choose between projects that have different life spans. Also, be aware of when this approach can be applied.

Explain the relevance of the criterion NPV=0 in setting a bid price for a capital project.

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