*All models can be constructed in Excel or similar spreadsheets with embedded macros for the more advanced models.
Brief description of supplementary capital budgeting tools:
• Sensitivity analysis allows for the change in one input variable at a time, such as sales or cost of capital, to see the change in NPV.
• Scenario analysis allows for the change in more than one variable at a time, including probabilities of such changes, to see the change in NPV.
• Inflation Adjusted Cash Flows adjusts expected future cash flows by an estimated inflation factor.
• Economic Value Added (EVA) measures managerial effectiveness in a given year or period (net operating profit after taxes – after tax cost of
capital required to support operations)
• Incremental IRR is the IRR of the difference in cash flows of two comparison projects; commonly used in replacement decisions
• Simulation is a method for calculating the probability distribution of possible outcomes.
• Market Value Added (MVA) is the market value of equity – equity capital supplied by shareholders.
• PERT/CPM is the analysis and mapping of the most efficient financial decision.
• Decision trees are graphical illustrations used to model a series of sequential outcomes, along with their associated probabilities.
• Complex mathematical models a general term inclusive of various option pricing model techniques, complex real options, and firm specific
proprietary models and methods.
• Linear programming identifies a set of projects that maximizes NPV subject to constraints (such as maximum available resources)
• Option pricing model include either binomial option pricing model or the Black-Scholes option pricing model, the latter used by firms such as
Merck with high R&D expenditures and relatively few, albeit large positive NPV investments.
• Real options include the opportunity for expansion, contraction, or abandonment of a capital project before the end of its life.
*All models can be constructed in Excel or similar spreadsheets with embedded macros for the more advanced models. Brief description of supplementary capital budgeting tools: • Sensitivity analysis allows for the change in one input variable at a time, such as sales or cost of capital, to see the change in NPV. • Scenario analysis allows for the change in more than one variable at a time, including probabilities of such changes, to see the change in NPV. • Inflation Adjusted Cash Flows adjusts expected future cash flows by an estimated inflation factor. • Economic Value Added (EVA) measures managerial effectiveness in a given year or period (net operating profit after taxes – after tax cost of capital required to support operations) • Incremental IRR is the IRR of the difference in cash flows of two comparison projects; commonly used in replacement decisions • Simulation is a method for calculating the probability distribution of possible outcomes. • Market Value Added (MVA) is the market value of equity – equity capital supplied by shareholders. • PERT/CPM is the analysis and mapping of the most efficient financial decision. • Decision trees are graphical illustrations used to model a series of sequential outcomes, along with their associated probabilities. • Complex mathematical models a general term inclusive of various option pricing model techniques, complex real options, and firm specific proprietary models and methods.
• Linear programming identifies a set of projects that maximizes NPV subject to constraints (such as maximum available resources)
• Option pricing model include either binomial option pricing model or the Black-Scholes option pricing model, the latter used by firms such as
Merck with high R&D expenditures and relatively few, albeit large positive NPV investments.
• Real options include the opportunity for expansion, contraction, or abandonment of a capital project before the end of its life.
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