Learning Outcome Statements

1. Cash flow projections

a. calculate the yearly cash flows of expansion and replacement capital projects and evaluate how the choice of depreciation method affects those cash flows;

b. explain how inflation affects capital budgeting analysis;

2. Comparing projects with unequal lives

c. evaluate capital projects and determine the optimal capital project in situations of 1) mutually exclusive projects with unequal lives, using either the least common multiple of lives approach or the equivalent annual annuity approach, and 2) capital rationing;

3. Risk analysis of capital investments - stand-alone methods

d. explain how sensitivity analysis, scenario analysis, and Monte Carlo simulation can be used to assess the stand-alone risk of a capital project;

4. Risk analysis of capital investments - market risk methods

e. explain and calculate the discount rate, based on market risk methods, to use in valuing a capital project;

5. Real options

f. describe types of real options and evaluate a capital project using real options;

6. Common capital budgeting pitfalls

g. describe common capital budgeting pitfalls;

7. Other income measures and valuation models

h. calculate and interpret accounting income and economic income in the context of capital budgeting;

i. distinguish among the economic profit, residual income, and claims valuation models for capital budgeting and evaluate a capital project using each.