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Ebook Fundamentals of corporate finance (3th edition): Part 2

(BQ) Part 2 book "Fundamentals of corporate finance" has contents: Net present value and other investment criteria; risk, return, and capital budgeting; project analysis; how corporations issue securities; leverage and capital structure; international financial management,.and other contents. | Section 4 Net Present Value and Other Investment Criteria Using Discounted Cash-Flow Analysis to Make Investment Decisions Risk, Return, and Capital Budgeting The Cost of Capital NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Net Present Value A Comment on Risk and Present Value Valuing Long-Lived Projects Investment Criteria When Projects Interact Mutually Exclusive Projects Investment Timing Other Investment Criteria Long- versus Short-Lived Equipment Internal Rate of Return Replacing an Old Machine A Closer Look at the Rate of Return Rule Mutually Exclusive Projects and the IRR Rule Calculating the Rate of Return for Long-Lived Projects Other Pitfalls of the IRR Rule A Word of Caution Capital Rationing Payback Soft Rationing Book Rate of Return Hard Rationing Pitfalls of the Profitability Index Summary A positive NPV always inspires confidence. This man is not worrying about the payback period or the book rate of return. © Jim Levitt/Impact Visuals 341 T he investment decision, also known as capital budgeting, is central to the success of the company. We have already seen that capital investments sometimes absorb substantial amounts of cash; they also have very long- term consequences. The assets you buy today may determine the business you are in many years hence. For some investment projects “substantial” is an understatement. Consider the following examples: ᭤ Construction of the Channel Tunnel linking England and France cost about $15 billion from 1986 to 1994. ᭤ The cost of bringing one new prescription drug to market was estimated to be at least $300 million. ᭤ The development cost of Ford’s “world car,” the Mondeo, was about $6 billion. ᭤ Production and merchandising costs for three new Star Wars movies will amount to about $3 billion. ᭤ The future development cost of a super-jumbo jet airliner, seating 600 to 800 passengers, has been estimated at over $10 billion. ᭤ TAPS, The Alaska Pipeline System, which brings crude oil from .