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1、confirmingpagesPART3CHAPTER"""""10BESTPRACTICESINCAPITALBUDGETINGProjectAnalysis!Havingreadourearlierchaptersoncapitalacceptancebyconsumers,maybeanotherdrillholebudgeting,youmayhaveconcludedthatthechoicewouldgiveyouabetterideaofthesizeoftheorebody,ofwhic
2、hprojectstoacceptorrejectisasimpleone.andmaybesomefurtherworkonthetestbedwouldYoujustneedtodrawupasetofcash-flowforecasts,confirmthedurabilityofthosewelds.choosetherightdiscountrate,andcrankoutnetIftheprojectreallyhasanegativeNPV,thesoonerpresentvalue.Bu
3、tfindingprojectsthatcreatevalueforyoucanidentifyit,thebetter.Andevenifyoudecidetheshareholderscanneverbereducedtoamechanicalthatitisworthgoingaheadwithoutfurtheranalysis,exercise.Wethereforedevotethenextthreechaptersyoudonotwanttobecaughtbysurpriseifthin
4、gsgotowaysinwhichcompaniescanstacktheoddsintheirwronglater.Youwanttoknowthedangersignalsandfavorwhenmakinginvestmentdecisions.theactionsthatyoumighttake.InvestmentproposalsmayemergefrommanyOursecondtaskinthischapteristoshowhowdifferentpartsoftheorganizat
5、ion.Socompaniesneedmanagersusesensitivityanalysis,break-evenanalysis,procedurestoensurethateveryprojectisassessedandMonteCarlosimulationtoidentifythecrucialconsistently.Ourfirsttaskinthischapteristoreviewassumptionsininvestmentproposalsandtoexplorewhatho
6、wfirmsdevelopplansandbudgetsforcapitalcangowrong.Thereisnomagicinthesetechniques,investments,howtheyauthorizespecificprojects,justcomputer-assistedcommonsense.Youdonotneedandhowtheycheckwhetherprojectsperformasalicensetousethem.promised.Discounted-cash-f
7、lowanalysiscommonlyassumesWhenmanagersarepresentedwithinvestmentthatcompaniesholdassetspassively,anditignoresproposals,theydonotacceptthecashflowforecastsattheopportunitiestoexpandtheprojectifitissuccessfulfacevalue.Instead,theytrytounderstandwhatmakesao
8、rtobailoutifitisnot.However,wisemanagersprojecttickandwhatcouldgowrongwithit.RememberrecognizetheseopportunitieswhenconsideringMurphy’slaw,“ifanythingcangowrong,itwill,”andwhethertoinvest.TheylookforwaystocapitalizeonO’Rei
