Capital Budgeting and Financial Modeling
Dr. Hong Wan
Summer 2019
Day 1: Tuesday, July 2 Investing Decisions Rules
Learning Outcome:
• Define net present value, payback period, internal rate of return, profitability index, and
incremental IRR.
• Describe decision rules for each of the tools in objective 1, for both stand-alone and mutually
exclusive projects.
• Given cash flows, compute the NPV, payback period, internal rate of return, and profitability
index for a given project, and the incremental IRR for a pair of projects.
• Compare each of the capital budgeting tools above, and tell why NPV always gives the correct
decision.
• Discuss the reasons IRR can give a flawed decision.
• Describe situations in which profitability index cannot be used to make a decision.
Discussion: “How Do CFOs Make Capital Budgeting and Capital Structure Decisions”, Journal of Applied
Corporate Finance, 2002, Vo1 15, issue 2 (p6-p9 and p30)
Excel Functions: PV, FV, NPER, Rate, NPV, IRR, IF, hlookup, vlookup, offset, index, choose, sum, sumif,
sumproduct
Practice: Excel practice (be familiar with the above excel functions)
Day 2: Thursday, July 4 Fundamental of Capital Budgeting
Learning Outcome:
• Given a set of facts, identify relevant cash flows for a capital budgeting problem.
• Explain why opportunity costs must be included in cash flows, while sunk costs and interest
expense must not.
• Calculate taxes that must be paid, including tax loss carry forwards and carry backs.
• Calculate free cash flows for a given project.
• Illustrate the impact of depreciation expense on cash flows.
• Describe the appropriate selection of discount rate for a particular set of circumstances. Use
breakeven analysis, sensitivity analysis, or scenario analysis to evaluate project risk.
• Use breakeven analysis, sensitivity analysis, or scenario analysis to evaluate project risk.
Discussion: Modeling Best Practice
Assignment:
Pressco Case
Financial modeling project
Day 3: Tuesday, July 9 Real Options
• Define the term “real option.”
