Wiley Capital Budgeting

Capital Budgeting:

Theory and Practice

Pamela P Peterson, Ph.D., CFA . Frank J. Fabozzi, Ph.D., CFA

JOHN WILEY & SONS

Copyright © 2002 by Frank J. Fabozzi. All rights reserved. Published by John Wiley & Sons, Inc. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate percopy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4744. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, (212) 850-6011, fax (212) 850-6008, E-Mail: PERMREQ@WILEY.COM. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional person should be sought.

ISBN: 0471-218-332

Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1

Contents

Section I: Making Investment Decisions 1. The Investment Problem and Capital Budgeting 2. Cash Flow Estimation 3. Integrative Examples and Cash Flow Estimation in Practice Case for Section I Questions for Section I Problems for Section I Section II: Capital Budgeting Evaluation Techniques 4. Payback and Discounted Payback Period Techniques 5. Net Present Value Technique 6. Profitability Index Technique 7. Internal Rate of Return Technique 8. Modified Internal Rate of Return Technique 9. Comparing Evaluation Techniques and

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