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This book addresses an ongoing challenge for business professionals and economists: how to allocate available financial resources among many possible investment projects.

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CONTENTS
PART Ⅰ Capital Budgeting with Certainty
  1 Capital Budgeting = 3
    The Role of Strategy in Investment Decision Making = 5
    Net Present Value and Productivity = 5
    Investments as Cash Flows = 7
    Estimate of Cash Flows = 9
    Strategic Net Present Value = 9
    Application of Capital Budgeting Techniques = 10
    Criteria for Evaluation Measures of Investment Worth = 11
    Budget Process and Planning = 12
    Conclusions = 12
    Discussion Questions = 13
    References = 13
  2 The Time Value of Money = 16
    Time Discounting = 16
    Future Value = 18
    Time Indifference: Present Value = 19
    Annual Equivalent Amounts = 26
    Nominal and Annual Percentage Rates = 27
    Continuous Cash Flows and Continuous Discounting = 28
    Conclusions = 33
    Problems = 35
    References = 40
  3 Capital Budgeting: The Meaning of Net Present Value = 41
    A Capital Budgeting Decision = 41
    The Net Present Value Decision Criterion = 43
    A Bird in the Hand = 45
    Investment Opportunities and Alternative Uses of Money = 47
    Present Value Factors as Prices = 48
    Two Explanations of Present Value = 49
    Logical Basis for the Net Present Value Method = 51
    Qualifications = 52
    Net Terminal Value = 53
    Time Zero = 53
    The Rollback Method = 53
    Why a Positive Net Present Value? = 54
    Conclusions = 54
    Problems = 55
    References = 58
  4 Measuring Investment Value: Decisions with Certainty = 59
    Methods of Classifying Investments = 59
    Measures of Investment Worth = 62
    The Elements of a Cash-Flow Projection = 63
    Two Discounted Cash-Flow Methods = 64
    Ranking by Inspection = 68
    Discounted Cash-Flow Methods = 71
    Limitation of Investment Rankings = 74
    What Firms Do = 77
    Conclusions = 79
    Appendix: Discounted Cash-Flow Formulations = 80
    Problems = 81
    References = 86
  5 Mutually Exclusive Investments = 87
    Net Present Value = 87
    Accept or Reject Decisions = 88
    Mutually Exclusive Investments = 89
    Present Value and Future Value = 101
    Why the Internal Rate of Return Method Is Popular = 102
    Conclusions = 102
    Problems = 104
    References = 111
  6 The Determination and Use of Cash Flows = 112
    Cash Flows = 113
    Opportunity Costs = 117
    Cash-Flow Determination = 118
    Depreciation Methods = 134
    The Effect of Tax Computation on Investment Analysis = 136
    Conclusions = 138
    Problems = 140
    References = 155
PART Ⅱ Capital Budgeting Applications and Some Operational Problems
  7 Annual Equivalent Costs and Replacement Decisions = 159
    Annual Equivalent Cost = 159
    Make or Buy Decisions = 160
    Comparability = 162
    The Replacement Decision = 168
    Replacement Chains = 170
    Public Utilities and Annual Cost = 171
    Conclusions = 173
    Problems = 173
    References = 180
  8 Capital Budgeting Under Capital Rationing = 181
    External Capital Rationing = 182
    Internal Capital Rationing = 186
    Ranking of Investments = 187
    Index of Present Value (or Profitability Index) = 190
    Programming Solutions = 193
    Capital Rationing and Risk = 194
    Conclusions = 194
    Problems = 195
    Discussion Questions = 199
    References = 200
  9 Capital Budgeting and Inflation = 202
    What is Inflation? = 202
    Real Cash Flows = 203
    Real and Nominal Discount Rates = 206
    Inflation Analysis: A Simplified Approach = 208
    Tax Effects = 209
    The Real Return and the Rate of Inflation = 211
    Conclusions = 213
    Problems = 214
    References = 218
  10 Accounting Concepts Consistent with Present-Value Calculations = 220
    Economic Depreciation = 220
    Assets with Positive Present Values = 222
    Residual Income = 225
    What Return Did I Earn? = 229
    Tax Effects = 233
    Taking the Long-Run Perspective Without Neglecting the Short Run = 237
    Conclusions = 242
    Problems = 243
    Discussion Questions = 248
    References = 248
  11 Buy or Lease = 249
    Borrow or Lease: The Financing Decision = 250
    A Lease Is Debt = 251
    Buy or Lease with Taxes: Using the After-Tax Borrowing Rate = 252
    Is the Equipment Worth Acquiring? = 254
    Using a Risk-Adjusted Discount Rate = 255
    Risk Considerations in Lease-Versus-Borrow Decisions = 255
    Leases with Uncertain Lives = 256
    The Rate of Discount = 258
    Leasing of Land = 259
    Leveraged Leases = 261
    The Alternative Minimum Tax = 263
    Conclusions = 264
    Problems = 266
    References = 270
  12 Investment Timing = 274
    Basic Principles of When to Start and Stop a Process = 275
    Growth-Type Investments = 276
    Equipment Replacement = 281
    The Strategy of Capacity Decisions = 282
    Conclusions = 286
    Problems = 286
    Discussion Questions = 290
    References = 290
  13 Fluctuating Rates of Output = 292
    A Plant with One Type of Equipment = 293
    Optimum Equipment Mix = 298
    More Periods or More Equipment Types = 300
    Conclusions = 304
    Problems = 304
    Discussion Questions = 309
    References = 309
  14 Investment Decisions with Additional Information = 310
    The Opportunity to Replicate = 311
    The Basic Model = 312
    Numerical Example = 313
    Sample Investment: Normal Prior Probability and Perfect Information = 315
    Delaying Other Investments = 317
    Imperfect Information = 318
    Post-Audit Bias = 321
    The Winner's Curse = 322
    Conclusions = 324
    Appendix: Calculations to Revise Probabilities = 324
    Problems = 325
    Discussion Question = 327
    References = 327
  15 Foreign Investments = 329
    Currency Translation = 329
    The Irrelevance of Future Plans = 331
    The Leverage Consideration = 331
    Taxes = 333
    Foreign Investment and Risk = 335
    Conclusions = 336
    Problems = 337
    References = 339
  16 Economic Evaluation of Investment Proposals: The Government's Point of View = 341
    Discrepancies Between Market Prices and Opportunity Prices = 343
    Indivisibilities = 345
    External Effects = 348
    Investments by Governments = 348
    Cost-Benefit Analysis = 350
    How a Federal Government Manager Should Analyze Buy-Versus-Lease Decisions = 351
    Conclusions = 355
    Problems = 356
    References = 360
PART Ⅲ Capital Budgeting with Uncertainty
  17 Capital Budgeting with Uncertainty = 363
    The State Preference Approach = 364
    Comparison of the State Preference and Present-Value Approaches = 367
    Valuation Models = 368
    Understanding the Project = 370
    Conclusions = 371
    Problems = 372
    References = 376
  18 The Rate of Discount and Uncertainty = 379
    The Sources of Cash = 380
    The Cost of Retained Earnings = 380
    A Theory of Stock Values = 383
    Changes in Stock Prices = 386
    Accumulated Depreciation and the Cost of Capital = 386
    Issuing Common Stock = 388
    Issuing Common Stock: The Element of Timing = 389
    Delaying the Investment = 390
    Cost of Long-Term Debt = 392
    Cost of Short-Term Debt = 392
    Debt and income Taxes = 393
    Weighted Average Cost of Capital = 394
    The Optimum Capital Structure = 395
    Weighted Average Cost of Capital and the Discount Rate = 397
    Summary of Weighted Average Cost of Capital = 400
    Default-Free Rate of Discount = 402
    Borrowing Rate = 403
    Comparing Average and Marginal Returns = 403
    Discounting Stock Equity Flows = 405
    Adjusted Present Value = 406
    Conclusions = 409
    Problems = 410
    Discussion Questions = 415
    References = 416
  19 The State Preference Approach = 417
    Prices with Certainty = 418
    Prices with Uncertainty = 418
    Multiperiod Investments = 423
    Conclusions = 427
    Problems = 427
    References = 432
  20 The Capital Asset Pricing Model = 434
    Relation to the State Preference Model = 435
    Introduction to Portfolio Analysis = 436
    The Efficient Frontier = 441
    The Capital Market Line = 443
    The Security Characteristic Line = 445
    Systematic and Unsystematic Risk = 447
    The Security Market Line = 448
    Required Rate of Return Versus Cost of Capital = 450
    Making Investment Decisions = 451
    Conclusions = 456
    Appendix: Derivation of the Risk-Adjusted Present-Value Relationship = 458
    Problems = 459
    References = 462
  21 Valuing Flexibility: An Application of Option-Valuation Techniques = 463
    Options = 464
    Valuing a Call Option = 465
    Option Pricing: A Binomial Model = 466
    Constructing a Hedge Portfolio = 467
    Black-Scholes = 471
    Definition of a Put Option = 473
    Option Valuation When There Is No Hedge Portfolio = 473
    Vacant Land = 474
    Option Situations Involving Real-Assets = 476
    Put Options on Real Assets = 477
    Embedded Options = 478
    Advantages of the Option Approach = 485
    Disadvantages of the Option Approach = 486
    Conclusions = 486
    Problems = 488
    References = 489
  22 A New Approach to Uncertainty = 492
    The Model = 492
    An Alternative Derivation = 497
    Applying the SDR Rule = 498
    Some Present-Value Factors = 498
    Conclusions = 500
    Appendix = 501
    Problems = 502
  23 A Manual = 504
    The Capital Appropriations Request (Form A) = 505
    Estimating Cash Flows from Operations (Form A-1) = 510
    Computing the Annual Depreciation Charges (Form A-2) = 514
    Summarizing the Cash Flow Information and Computing Present Values (Form A-3) = 514
    Avoiding Errors Resulting from Improper Comparisons = 516
    Bringing in Inflation = 518
    Company Manuals We Have Seen = 518
    The Capital Budget Cycle = 519
    Conclusions = 519
    References = 519
PART Ⅳ Cases
  CASE 1 The Oneida Tomato Company = 523
  CASE 2 Wellesley Woolen Company = 525
  CASE 3 Norwalk Screw Company = 526
  CASE 4 The Calculating Energy Saver = 529
  CASE 5 The A Company's Manual = 530
  CASE 6 Fall River Lumber Company = 533
  CASE 7 Jacobs Division = 542
  CASE 8 The Modern Corporation = 550
  CASE 9 Community Edison Company = 552
  CASE 10 The Algone Case = 554
  CASE 11 Bokaro Steel Plant = 558
  CASE 12 The Eatwell Company = 559
  CASE 13 Rokal Company = 561
  CASE 14 The A Chemical Company = 563
  CASE 15 The Detroit Tool Company = 565
  CASE 16 The Lansing Lift Company = 566
  CASE 17 The Toledo Glass Company = 568
  CASE 18 The Continental Company = 569
  CASE 19 The Midwest Company = 571
APPENDIX TABLES
  A Present Value of $1.00 = 574
  B Present Value of $1.00 Received per Period = 576
  C Present Value of Declining Balance Depreciation Amounts = 578
  D Depreciation Expense per Year Taking into Account Half-Year Convention and Optimal Switch to Straight Line = 579
  E \mathop e-x = 580
  F Normal Probability Distribution Function = 582
Index = 585