Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

10. Making Capital Investment Decisions

Investment Decisions

(^340) © The McGraw−Hill
Companies, 2002

CHAPTER

10

Making Capital

Investment Decisions

In late April 2000,Unilever PLC, the Anglo-Dutch consumer products giant,

announced it would make two significant additions to its menu of products at a

total cost of $2.6 billion. First, in a bid to be a player in the diet sector, Unilever

acquired SlimFast Foods, Inc., the Florida-based maker of diet products, in

a deal valued at $2.3 billion. At the time, SlimFast commanded roughly a

45 percent share of the U.S. market for diet and nutrition products. Second, to

increase its market share in a decidedly un-diet sector, Unilever acquired Ben &

Jerry’s Homemade, Inc., the well-known ice cream chain, for $326 million. Both

moves were aimed at increasing the firm’s presence in the U.S. market.

As you no doubt recognize from your study of the previous chapter, these

acquisitions represent capital budgeting decisions. In this chapter, we further

investigate capital budgeting decisions, how they are made, and how to look at

them objectively.

This chapter follows up on our previous one by delving more deeply into

capital budgeting. We have two main tasks. First, recall that in the last chapter,

we saw that cash flow estimates are the critical input into a net present value

analysis, but we didn’t say very much about where these cash flows come from;

so we will now examine this question in some detail. Our second goal is to learn

how to critically examine NPV estimates, and, in particular, how to evaluate the

sensitivity of NPV estimates to assumptions made about the uncertain future.

o far, we’ve covered various parts of the capital budgeting decision. Our task in

this chapter is to start bringing these pieces together. In particular, we will show

you how to “spread the numbers” for a proposed investment or project and, based

on those numbers, make an initial assessment about whether or not the project

should be undertaken.

In the discussion that follows, we focus on the process of setting up a discounted cash

flow analysis. From the last chapter, we know that the projected future cash flows are

the key element in such an evaluation. Accordingly, we emphasize working with finan-

cial and accounting information to come up with these figures.

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