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Learning Objective. Given the concepts of Decision Analysis, Option Pricing and Investment Decisions, the trainee will be able to audit the capital budgeting proposals of projects and critically examine the decisions of management as evaluated by the instructor. Three stages of capital budgeting.

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Presentation Transcript
Learning objective
Learning Objective

  • Given the concepts of Decision Analysis, Option Pricing and Investment Decisions, the trainee will be able to audit the capital budgeting proposals of projects and critically examine the decisions of management as evaluated by the instructor

RTI,Chennai


Three stages of capital budgeting
Three stages of capital budgeting

  • Decision Analysis

  • Exploring the options

  • Investment decision

RTI,Chennai


Decision analysis
Decision Analysis

  • Multiple Attribute Decision Model (MADM)

RTI,Chennai


Advantages
Advantages

  • Consideration of financial and non-financial criteria

  • Judgements and assumptions and its impact

  • Important factors are weighed more

  • Collective decision

RTI,Chennai


Option pricing
Option Pricing

  • Three common sources of options

    • Timing option

    • Abandonment options

    • Growth options

RTI,Chennai


Investment decision
Investment decision

  • Importance of Time value of money

    • Inflation

    • Uncertainty

    • Opportunity costs

  • Calculation of discounted cash flow

RTI,Chennai


Economic criteria
Economic criteria

  • Net Present Value (NPV)

  • Internal Rate of Return (IRR)

  • Discounted Pay Back (DPB)

RTI,Chennai


Risk analysis
Risk Analysis

  • Different levels of risks between projects

  • Risks specific to foreign projects

  • Comparing the actuals with estimates during execution of the projects

RTI,Chennai