Topic #1 - Capital Budgeting: Other Topics - Chapters 12-13
Objectives
After reading this chapter, students should be able to:
Explain three reasons why corporate risk is important even if a firm’s stockholders are well diversified.
Identify two reasons why stand-alone risk is important.
Demonstrate sensitivity and scenario analyses and explain Monte Carlo simulation.
Discuss the two methods used to incorporate risk into capital budgeting decisions.
Use the replacement chain method to compare projects with unequal lives.
Define the term option value, and identify four different types of embedded real options.
Explain what an abandonment option is, and give an example of a project that includes one.
Identify the term decision tree and provide an example of one.
Explain what an investment timing option is, and give an example of a project that includes one. Explain what a growth option is, and give an example of a project that includes one.
Explain what a flexibility option is, and give an example of a project that includes one.
Specific Topics
Project Risk
Measurement of Stand-Alone Risk
Sensitivity Analysis
Scenario Analysis
Monte Carlo Simulation
Projects with Unequal Lives
Replacement Chain Approach
Options
Real
Abandonment/Shutdown
Investment Timing
Growth
Flexibility
Optimal Capital Budget (Introduction)