Notes #3 CapBudg - ` Professor Kose John Notes on Capital...

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` Professor Kose John Notes on Capital Budgeting and Real Options These notes contain some brief overview of capital budgeting criteria, examples of the steps involved in capital budgeting and a detailed discussion of real options in capital budgeting. The net present value rule is a simple application of the valuation rule to take investment (or capital budgeting) decisions optimally in corporate finance. Net present value captures the incremental value that a new capital expenditure provides to the shareholders of the firm. We will discuss the conditions under which NPV rule and the IRR rule comes up with identical decisions and when they do not. Examples of capital budgeting are included here, including advanced issues of dealing with risk and the presence of real options. The case Super Project Case also gets us into the real word issues of capital budgeting. Another good example of looking at detailed capital budgeting is IM&C’s Fertilizer project in section 6.2 of textbook on pgs 124 to 127. Read the discussion on pg 130 of computing NPV in other countries and currencies.(pg 130, end of section 6.2.). Example: GIGO Computer Dating Services is considering replacing its current computer with a new generation model. The ABM salesperson has demonstrated a model which would cost GIGO $750,000 should last 10 years and reduce costs by $100,000 annually.
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