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Capital Budgeting

In: Corporate Finance for Long-Term Value

Author

Listed:
  • Dirk Schoenmaker

    (Erasmus University Rotterdam)

  • Willem Schramade

    (Nyenrode Business University)

Abstract

In this chapter, we dive deeper into the capital budgeting process, which is the process of making a list of investment projects to be done. We make these investment decisions more tangible by presenting detailed calculation examples—including the calculation and forecasting of (incremental) cash flows and their drivers. Subsequently, we identify behavioural challenges in the capital budgeting process, such as the tendency to continue poor projects for too long, to underestimate risk, and to overestimate cash flows. Next, we integrate social and environmental factors in the capital budgeting process—integrated capital budgeting. The constrained, expanded, and integrated PVs (introduced in Chap. 6 ) are now shown with cash flow projections. It is shown that FV, SV, and EV can have shared, reinforcing, or conflicting underlying value drivers—and that the way and extent to which they are taken into account affect decisions.

Suggested Citation

  • Dirk Schoenmaker & Willem Schramade, 2023. "Capital Budgeting," Springer Texts in Business and Economics, in: Corporate Finance for Long-Term Value, chapter 7, pages 173-204, Springer.
    • Handle: RePEc:spr:sptchp:978-3-031-35009-2_7
    DOI: 10.1007/978-3-031-35009-2_7
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