Capital Budgeting Valuation Financial Analysis for Today's Investment Projects Robert W. Kolb Series

With the collapse of the economy and financial systems, many institutions are reevaluating what they are willing to spend money on. Project valuation is key to both cost effectiveness measures and shareholder value.

The purpose of this book is to provide a comprehensive examination of critical capital budgeting topics. Coverage extends from discussing basic concepts, principles, and techniques to their application to increasingly complex, real-world situations. Throughout, the book emphasizes how financially sound capital budgeting facilitates the process of value creation and discusses why various theories make sense and how firms can use them to solve problems and create wealth.

• Offers a strategic focus on the application of various techniques and approaches related to a firm's overall strategy
• Provides coverage of international topics based on the premise that managers should view business from a global perspective
• Emphasizes the importance of using real options

Comprised of contributed chapters from both experienced professionals and academics, Capital Budgeting Valuation offers a variety of perspectives and a rich interplay of ideas related to this important financial discipline.

Acknowledgments ix

1 Capital Budgeting: An Overview 1
H. Kent Baker and Philip English

Part I Foundation and Key Concepts 17

2 Corporate Strategy and Investment Decisions 19
Daniel Ferreira

3 Corporate Governance and Investment Decisions 37
Fodil Adjaoud, Dorra Charfi, and Lamia Chourou

Part II Capital Investment Choice 57

4 Measuring Investment Value: Free Cash Flow, Net Present Value, and Economic Value Added 59
Tom Arnold and Terry Nixon

5 Alternative Methods of Evaluating Capital Investments 79
Tom Arnold and Terry Nixon

6 Capital Rationing for Capital Budgeting 95
Alexander Brüggen

7 Analyzing Foreign Investments 111
Wim Westerman and John Henry Hall

8 Postcompletion Auditing of Capital Investments 131
Jari Huikku

9 Capital Budgeting Techniques in Practice: U.S. Survey Evidence 151
Tarun K. Mukherjee and Naseem M. Al Rahahleh

Part III Project Cash Flows and Inflation 173

10 Estimating Project Cash Flows 175
Kyle Meyer and Halil Kiymaz

11 Capital Budgeting and Inflation 197
Ignacio Vélez-Pareja and Joseph Tham

Part IV Risk and Investment Choice 215

12 Basic Risk Adjustment Techniques in Capital Budgeting 217
John H. Hall and Wim Westerman

13 Capital Budgeting with Political/Country Risk 241
Yacine Belghitar and Ephraim Clark

14 Risk Management in Project Finance 259
Stefano Gatti and Stefano Caselli

15 Risk Simulation Concepts and Methods 279
Tom Arnold and David North

Part V Real Options and Project Analysis 299

16 Real Options Analysis: An Introduction 301
Tom Arnold and Bonnie Buchanan

17 Applications of Real Options Analysis 321
Tom Arnold and Bonnie Buchanan

Part VI Estimating the Project Cost of Capital 337

18 Cost of Capital: An Introduction 339
Octavian Ionici, Kenneth Small, and Frank D’Souza

19 Using the Capital Asset Pricing Model and Arbitrage Pricing Theory in Capital Budgeting 363
S. David Young and Samir Saadi

20 Financing Mix and Project Valuation: Alternative Methods and Possible Adjustments 381
Alex Pierru and Denis Babusiaux

Part VII Special Topics 403

21 Capital Budgeting for Government Entities 405
Davina F. Jacobs

22 Decision Making Using Behavioral Finance for Capital Budgeting 421
Yuri Biondi and Giuseppe Marzo

23 Merger and Acquisition Pricing: The Valuation of Synergy 445
Rainer Lenz

24 Multicriteria Analysis for Capital Budgeting 463
Fernando R. Fernholz

Answers to Discussion Questions 483

Index 507

DAVID L. H. KENT BAKER, PHD, CFA, CMA, is University Professor of Finance and Kogod Research Professor at the Kogod School of Business at American University, Washington, D.C. He has published extensively in leading academic and professional finance journals including the Journal of Finance, Journal of Financial and Quantitative Analysis, Financial Management, Financial Analysts Journal, and Journal of Portfolio Management. Recognized as one of the most prolific authors in finance during the past fifty years, Professor Baker has consulting and training experience with more than 100 organizations and has been listed in fifteen biographies.

PHILIP ENGLISH is an Assistant Professor of Finance and Real Estate at the Kogod School of Business, American University. He currently serves as Director of the Master of Science in Finance and Master of Science in Real Estate programs. Before pursuing a doctorate, English worked as the primary financial officer and director of product development for Campbell Classics, a Virginia-based manufacturing firm. Professor English's research interests focus on the role of the legal environment in emerging markets, corporate governance, and mutual fund regulation. He has published in the Journal of Financial Research, Journal of Corporate Finance, Journal of Law and Economics, and Emerging Markets Review.