Fundamentals of Corporate Finance Third edition Chapter 8 Project Brealey Myers Marcus Analysis ndamentals of Corporate Finan Brealey Myers Marcus slides by Matthew will IrwinMcGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 8- 1 Irwin/McGraw-Hill Chapter 8 Fundamentals of Corporate Finance Third Edition Project Analysis Brealey Myers Marcus slides by Matthew Will Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc.,2001
8-2 Topics Covered SHow Firms Organize Their Investment Process OSome"What If Questions Sensitivity Analysis → Break Even analysis FLexibility in Capital Budgeting → Decision trees → Options Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 8- 2 Irwin/McGraw-Hill Topics Covered How Firms Organize Their Investment Process Some “What If” Questions ➔Sensitivity Analysis ➔Break Even Analysis Flexibility in Capital Budgeting ➔Decision Trees ➔Options
8-3 Capital Budgeting Process Capital budget- The list of planned Investment projects The Decision process 1- Develop and rank all investment projects 2- Authorize projects based on Govt regulation Production efficiency Capacity requirements NPV Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 8- 3 Irwin/McGraw-Hill Capital Budgeting Process Capital Budget - The list of planned investment projects. The Decision Process 1 - Develop and rank all investment projects 2 - Authorize projects based on: • Govt regulation • Production efficiency • Capacity requirements • NPV
8-4 Capital Budgeting Process CApital budgeting problems Consistent forecasts → Conflict of interest → Forecast bias )Selection criteria(NPV and others) Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 8- 4 Irwin/McGraw-Hill Capital Budgeting Process Capital Budgeting Problems ➔Consistent forecasts ➔Conflict of interest ➔Forecast bias ➔Selection criteria (NPV and others)
8-5 How To Handle uncertainty Sensitivity analysis-Analysis of the effects of changes in sales, costs, etc on a project Scenario Analysis- Project analysis given a particular combination of assumptions Simulation Analysis-Estimation of the probabilities of different possible outcomes Break even analysis analysis of the level of sales(or other variable) at which the company breaks even Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 8- 5 Irwin/McGraw-Hill How To Handle Uncertainty Sensitivity Analysis - Analysis of the effects of changes in sales, costs, etc. on a project. Scenario Analysis - Project analysis given a particular combination of assumptions. Simulation Analysis - Estimation of the probabilities of different possible outcomes. Break Even Analysis - Analysis of the level of sales (or other variable) at which the company breaks even