Introduction to Corporate Finance

what companies do

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RISK AND CAPITAL BUDGETING

11-1 Choosing the right discount rate

11-2 A closer look at risk

11-3 Real options

11-4 Strategy and capital budgeting

AS THE TEXTBOOKS WOULD WANT

Modern infrastructure developments in Australia

provide many investment opportunities for

companies. The Australian Federal Government,

through its Infrastructure Australia arm, has

developed a set of guidelines for project champions

to use in presenting their proposals for government

funding. The critical area of proposal evaluation

is summarised in the following text, which should

sound very familiar to experienced students of

corporate finance looking at capital budgeting.

In preparing and presenting results of detailed

economic appraisal, proponents must:

1 Submit robust and objective cost benefit

analysis which is supported by strong

evidence. In order to demonstrate that

the cost benefit analysis is indeed robust,

full transparency of the assumptions,

parameters and values which are used in

each cost benefit analysis is required. In

addition, substantial supporting evidence

to demonstrate that the input data

underpinning the cost benefit analysis –

notably the demand/price forecasts, and

capital/operational costs are justified – is also

required. Clearly, independent verification of

these elements will offer a greater degree of

confidence that the data is robust.

2 Consider as many monetised economic

benefits and costs as possible.

Developments in cost benefit analysis

methodologies mean that impacts such

as noise and greenhouse can, in many

circumstances, be monetised. Infrastructure

Australia seeks proponents to capture

impacts on a range of stakeholders to reflect

the community-wide perspective of cost

benefit analysis. In addition, highly beneficial

or detrimental impacts should be monetised

wherever possible, particularly if this benefit

is the primary purpose of the initiative.

All benefits and costs included in the cost

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Express