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Module 5

Module 5. Strategic decisions: Capital budgeting and cash flow estimation.

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Module 5

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  1. Module 5 Strategic decisions: Capital budgeting and cash flow estimation • In this module, you study the capital budgeting process and how cash flows are estimated. First, the general administrative structure that exists in most firms for the capital budgeting decision process, and the reasons for such a structure, are described. You determine which cash flows are relevant in capital budgeting and apply the present value technique to determine the value of tax shields arising from CCA. The module also describes the additional analysis necessary when cash flows are uncertain, and the additional complications that are introduced by cash flows involving international operations. Finally, you will identify ethical issues facing business in international contexts.

  2. Describe the capital budgeting decision process. • The capital budgeting process involves • project generation • project analysis • project approval • project follow-up

  3. Relevant cash flows to evaluate in capital budgeting • Rules for estimating cash flows: • Use actual cash flows, not accounting income. • Use incremental cash flows, ignoring sunk costs but including opportunity costs. • Use nominal cash flows. • Use after-tax cash flows.

  4. Calculate the present value of the tax shields arising from CCA. • The present value of tax savings (PVTS) due to capital cost allowance (CCA) is

  5. Perform the additional analysis necessary when cash flows are uncertain. • Uncertain cash flows require estimation of • the mean (average) of cash flow using a probability distribution • the variance or beta as a measure of systematic risk • Risk-adjusted discount rates are used for cash flows of projects in different risk classes.

  6. Identify the additional complications introduced by international operations. • The major additional risks of foreign projects include • future exchange rates • political uncertainties, such as the risk of expropriation and limitations on the repatriation of profits

  7. Identify ethical issues facing businesses in international contexts. • Overseas expansion has implications for the domestic labour force. • Businesses must consider environmental, health, safety, and employment regulations in the foreign country.

  8. Presentation complete!

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