Major Topics
Learning Objectives
- Identify and discuss the problems comparing projects of unequal sizes and/or unequal lives.
- Identify the rationale for using real options to mitigate project risk and identify different types of real options available to management.
- Recognize capital budgeting risk analysis techniques such as sensitivity analysis, scenario planning, and Monte Carlo simulation.
- Identify alternative approaches to dealing with risk in capital investments.
- Recognize why cash flows and discount rates should be adjusted if project cash flows are more or less risky than normal.
- Identify capital rationing, mutually exclusive, and independent projects.
- Identify and compare NPV and IRR, focusing on the advantages and disadvantages of each.
- Explore the factors that influence the discount rates used for capital projects.
- Discover how to calculate NPV and IRR and demonstrate an understanding of the decision criteria of each method to determine acceptable projects.
- Recognize the benefits and limitations of the payback method and discounted payback methods.
- Identify and calculate the pre-tax and post-tax cash flows related to the end of a capital projects life.
- Identify and calculate the pre-tax and post-tax cash flows during the period the project is in operation from revenue, operating expense, and changes to working capital.
- Identify and calculate the pre-tax and post-tax cash flows related to the initial investment of a capital project.
- Recognize relevant and irrelevant costs related to capital budgeting.
- Identify capital budgeting and the steps undertaken in developing and implementing capital budgets.
Course Description
Several factors make investment decisions using capital budgeting one of the most important functions financial managers are involved with: capital used to fund investment projects is limited, and must be carefully allocated across the entire business; investments require the use of large amount of cash, limiting future financial flexibility; if a firm invests too much into a capital project, it could have high depreciation on an asset with limited value; if a firm invests too little into a capital project, it may have limited capacity, putting it at a disadvantage versus competitors; timing is important, ideally investment projects are completed as close to when they are needed
This course provides an overview of the concepts of capital budgeting for investment decision making from the perspective of a finance and accounting organization, emphasizing the integration of cash flows, net present value analysis, risk assessment and risk management.
The course starts with an overview of the capital budgeting process and then reviews the analysis of cash flows during the development, operating and end of project phases. An explanation of the
This course covers the “Investment Decisions” material covered in the Certified Management Accountant (CMA) Part 2 examination.
Topics include: Capital Budgeting Process, Cash Flow Analysis, Payback and Discounted Payback, Net Present Value (NPV) and Internal Rate of Return (IRR), Risk Analysis in Capital Budgeting, Evaluating and Ranking Capital Projects, Risk Mitigation Using Real Options
Compliance Information
Advanced Preparation
None
Field of Study
Accounting
Credits
2.5 Credits
Published Date
May 17, 2022
Course Authors
Tom Coghlan
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