chapter 9 - Chapter 9 Project analysis COPYRIGHTZHULI 1...

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COPYRIGHT©ZHULI 1 Chapter 9 Project analysis
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COPYRIGHT©ZHULI 2 Objectives 1. Appreciate the practical problems of capital budgeting in large corporations 2. Use sensitivity, scenario, and break-even analysis to see how project profitability would be affected by an error in your forecasts and to understand why and overestimate of sales is more serious for projects with high operating leverage
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COPYRIGHT©ZHULI 3 Content How firms organize the investment process Some “what-if” questions Break-even analysis
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COPYRIGHT©ZHULI 4 For most large corporations there are two stages in the investment process The preparation of the capital budget , which is a list of planned investments The authorization process for individual projects Capital budgeting is usually a cooperative effort, and this brings with it some challenges Ensuring that forecasts are consistent Eliminating conflicts of interest Reducing forecast bias Sorting the wheat from the chaff
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COPYRIGHT©ZHULI 5 Investment projects should never be selected through a purely mechanical process. Managers need to ask why a project should have a positive NPV. A positive NPV is plausible only if the company has some competitive advantage that prevents its rivals from stealing most of the gains
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COPYRIGHT©ZHULI 6 Competitive advantage: r& &&
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chapter 9 - Chapter 9 Project analysis COPYRIGHTZHULI 1...

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