Capital Budgeting Valuation: Financial Analysis for Todays Investment Projects

Capital Budgeting Valuation

The Robert W. Kolb Series in Finance is an unparalleled source of information dedicated to the most important issues in modern finance. Each book focuses on a specific topic in the field of finance and contains contributed chapters from both respected academics and experienced financial professionals. As part of the Robert W. Kolb Series in Finance, Capital Budgeting Valuation provides an engaging look at the key themes surrounding this discipline and shows you what it takes to make more informed decisions when considering potentially costly investment projects for your organization.

Divided into seven comprehensive parts, this timely guide contains detailed coverage that extends from the basic components of capital budgeting and existing theories to their application in an increasingly complex business world. Page by page, the book addresses topics that will put you in a better position to excel at this endeavor, including the various methods of evaluating capital investments, risk management in project finance, estimating the project cost of capital, and the potential benefits of using real options in the capital budgeting process to name a few.

Capital budgeting surveys that reveal the link between theory and practice are also included, and based on the premise that managers should view business from a global perspective, important international issues associated with capital budgeting are discussed as well.

Filled with in–depth insights and expert advice, Capital Budgeting Valuation offers a variety of perspectives and a rich interplay of ideas related to this important financial discipline.

Acknowledgments ix

1 Capital Budgeting: An Overview 1
H. Kent Baker and Philip English

PART I Foundation and Key Concepts 17

2 Corporate Strategy and Investment Decisions 19
Daniel Ferreira

3 Corporate Governance and Investment Decisions 37
Fodil Adjaoud, Dorra Charfi, and Lamia Chourou

PART II Capital Investment Choice 57

4 Measuring Investment Value: Free Cash Flow, Net Present Value, and Economic Value Added 59
Tom Arnold and Terry Nixon

5 Alternative Methods of Evaluating Capital Investments 79
Tom Arnold and Terry Nixon

6 Capital Rationing for Capital Budgeting 95
Alexander Brüggen

7 Analyzing Foreign Investments 111
Wim Westerman and John Henry Hall

8 Postcompletion Auditing of Capital Investments 131
Jari Huikku

9 Capital Budgeting Techniques in Practice: U.S. Survey Evidence 151
Tarun K. Mukherjee and Naseem M. Al Rahahleh

PART III Project Cash Flows and Inflation 173

10 Estimating Project Cash Flows 175
Kyle Meyer and Halil Kiymaz

11 Capital Budgeting and Inflation 197
Ignacio V´elez–Pareja and Joseph Tham

PART IV Risk and Investment Choice 215

12 Basic Risk Adjustment Techniques in Capital Budgeting 217
John H. Hall and Wim Westerman

13 Capital Budgeting with Political/Country Risk 241
Yacine Belghitar and Ephraim Clark

14 Risk Management in Project Finance 259
Stefano Gatti and Stefano Caselli

15 Risk Simulation Concepts and Methods 279
Tom Arnold and David North

PART V Real Options and Project Analysis 299

16 Real Options Analysis: An Introduction 301
Tom Arnold and Bonnie Buchanan

17 Applications of Real Options Analysis 321
Tom Arnold and Bonnie Buchanan

PART VI Estimating the Project Cost of Capital 337

18 Cost of Capital: An Introduction 339
Octavian Ionici, Kenneth Small, and Frank D Souza

19 Using the Capital Asset Pricing Model and Arbitrage Pricing Theory in Capital Budgeting 363
S. David Young and Samir Saadi

20 Financing Mix and Project Valuation: Alternative Methods and Possible Adjustments 381
Alex Pierru and Denis Babusiaux

PART VII Special Topics 403

21 Capital Budgeting for Government Entities 405
Davina F. Jacobs

22 Decision Making Using Behavioral Finance for Capital Budgeting 421
Yuri Biondi and Giuseppe Marzo

23 Merger and Acquisition Pricing: The Valuation of Synergy 445
Rainer Lenz

24 Multicriteria Analysis for Capital Budgeting 463
Fernando R. Fernholz

Answers to Discussion Questions 483

Index 507

H. Kent Baker, PhD, CFA, CMA, is University Professor of Finance and Kogod Research Professor at the Kogod School of Business at American University, Washington, D.C. He has published extensively in leading academic and professional finance journals including the Journal of Finance, Journal of Financial and Quantitative Analysis, Financial Management, Financial Analysts Journal, and Journal of Portfolio Management. Recognized as one of the most prolific authors in finance during the past fifty years, Professor Baker has consulting and training experience with more than 100 organizations and has been listed in fifteen biographies.

Philip English is an Assistant Professor of Finance and Real Estate at the Kogod School of Business, American University. He currently serves as Director of the Master of Science in Finance and Master of Science in Real Estate programs. Before pursuing a doctorate, English worked as the primary financial officer and director of product development for Campbell Classics, a Virginia–based manufacturing firm. Professor English′s research interests focus on the role of the legal environment in emerging markets, corporate governance, and mutual fund regulation. He has published in the Journal of Financial Research, Journal of Corporate Finance, Journal of Law and Economics, and Emerging Markets Review.