FINE 2000 Chapter Notes - Chapter 10: Net Present Value, Capital Budgeting, Scenario Analysis
6 Nov 2014
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Usually requires information such as: outlays required by law/company policy should be satisfied at lowest possible cost, maintenance/cost reduction capital budgeting decisions; when the best time is to replace equipment (when firm will be most profitable, capacity expansion in existing business affected by demand forecasts, shifts in technology, and reactions of competitors, investments for new products. Problems: consistency of forecasts: bottom up suggestions may be based on assumptions inconsistent with the economic/competitive assumptions used by mgmt. firms should establish a forecast of economic indicators (ex. inflation, prices of raw materials) which are common for all project analyses, conflicts of interest: when employee goals aren"t aligned with shareholder goals (ex. projects with quick payback periods instead of long ones to show immediate value creation, forecast bias: employees who really want a project accepted are likely to overstate benefits and understate costs.
