CHAPTER 2

CAPITAL BUDGETING

John D. Stowe, CFA

Athens, Ohio, U.S.A.

Jacques R. Gagné, CFA

Quebec City, Quebec, Canada

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• Describe the capital budgeting process, including the typical steps of the process, and distinguish among the various categories of capital projects.
• Describe the basic principles of capital budgeting, including cash flow estimation.
• Explain how the evaluation and selection of capital projects is affected by mutually exclusive projects, project sequencing, and capital rationing.
• Calculate and interpret the results using each of the following methods to evaluate a single capital project: net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, average accounting rate of return (AAR), and profitability index (PI).