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Unformatted text preview: ECON*2560- Theory of Finance CHAPTER 9: PROJECT ANALYSIS- Discounted cash flow can be used to value projects , but good investment decisions also require good data - How can firms organize capital budgeting to obtain valuable information? o Forecasting should never be mechanical, they require a lot of what if questions 9.1 HOW FIRMS ORGANIZE THE INVESTMENT PROCESS - promising investment opportunities must be identified and they must fit in with the firms strategic goals- To evaluate these opportunities properly, financial managers need unbiased cash-flow forecasts that have not been skewed to sell a project to upper management o Firms need to establish systems that facilitate effective communication across different parts of the organization STAGE 1: THE CAPITAL BUDGET Capital budget: list of planned investment projects - Generally head office asks divisions what investments they would like to make ; asks them for their capital budget - Budget may undergo negotiations and is either accepted or rejected- Senior managements concern is to see that capital budget matches firms strategic plans Must ensure that firm is concentrating it efforts in areas where it has competitive advantage ; spot those project declining in business that should be sold or allowed to run down- Capital budgeting and strategic planning should complement each other Plant and division managers who do most of the work in bottom up capital budgeting may not se the forest for the trees. Whereas budgeting may not se the forest for the trees....
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- Spring '11