Introduction to Corporate Finance

9: Capital Budgeting Process and Decision Criteria

various techniques but also the logic that explains why some methods are better than others. As challenging

as that sounds, there is no reason to worry. We have already used these tools to value bonds and shares, and

now we will apply the discounted cash flow apparatus to real assets such as plant and equipment.

9 -1b A CAPITAL BUDGETING PROBLEM

We apply each of the decision-making techniques in this chapter to a single, simplified business problem

currently facing Global Untethered, a (fictitious) Australia-based worldwide provider of wireless telephony

services. Mobile carriers are scrambling to attract and retain customers in this highly competitive market.

According to customer surveys, the number one reason for selecting a given carrier (or for switching to

a new one) is the quality of service. For instance,

customers who lose calls as they commute to work

or travel from one business location to another are

apt to switch if another carrier offers fewer service

interruptions.

Against this backdrop, Global Untethered is

contemplating a major expansion of its wireless

network in two different regions. Figure 9.1

What methods do companies

use to analyse the financial

merits of investment

opportunities?

thinking cap

question

Initial outlay –$250 million

Year 1 inflow $35 million

Year 2 inflow $80 million

Year 3 inflow $130 million

Year 4 inflow $160 million

Year 5 inflow $175 million

FIGURE 9.1 GLOBAL UNTETHERED INVESTMENT PROPOSALS

The time lines depict the cash flows for Global Untethered’s proposed expansion projects, the Western Europe expansion
and the South-eastern Australian toehold.

0 1 2 3 4 5

End of year

$35 $80 $130 $160 $175

–$250

Western Europe expansion ($ millions)

0 1 2 3 4 5

End of year

$18 $22 $25 $30 $32

–$50

South-eastern Australia toehold ($ millions)