Introduction 1
The nature of investment decisions 1
The decision process 2
Investment decision making 4
Technology and investment decision making 9
Summary 10
Notes 10
Quickie questions 11
Wealth maximation and the company 12
1 Corporate objectives,management objectives and corporate governance 12
ContentsPreface 13
Ownership and control 14
Regulation of the relationships between directors and shareholders 14
Incentive schemes 20
Conclusion 23
Summary 24
Further reading 25
Notes 25
Quickie questions 26
Problems 26
2 Strategic planning and the finance function 27
Introduction 27
Strategic business planning 28
Competetive analysis 30
Investment and financing strategy 31
The role of financial management 32
The firm in the economy 35
Risk and return 37
Summary 38
Notes 39
Further reading 39
Quickie questions 39
Problems 40
Introduction 41
3 Traditional methods of investment appraisal 41
The payback method 42
The return on capital employed 48
Summary 52
Notes 53
Further reading 55
Quickie questions 55
Problems 56
Introduction to the model 58
4 The single-period investment consumption decision model 58
The time value of money 60
The basic graphical analysis 61
Introduction of capital markets 63
Payback and ROCE 70
Summary 70
Notes 71
Problem 74
Quickie questions 74
Further reading 74
5 The discounted cash flow approach 76
Net present value 76
Alternative interpretations of NPV 82
Internal rate of return 86
Discounted payback 92
Truncated NPV 93
Summary 93
Appendix:compounding and discounting 94
Notes 98
Further reading 99
Quickie questions 99
Problems 100
6 Net present value and internal rate of return developed 103
NPV and project interdependence 103
NPV and mutually exclusive projects 103
IRR rule and interdependent projects 107
Extending the time horizon 116
Multiple IRRs 117
The modified IRR 122
The replacement cycle problem 124
Notes 128
Further reading 129
Quickie questions 129
Problems 130
7 Project appraisal cash flows 132
Investment appraisal and inflation 132
Investment appraisal and taxation 138
Financing cash flows 139
Investment appraisal and the relevant cash flow 143
Summary 147
Appendix:the UK corporate tax system 148
Notes 148
Further reading 149
Quickie questions 150
Problems 150
Capital rationing 154
8 Capital market imperfections 154
Single-period capital rationing 158
Multi-period capital rationing 163
Lend-borrow interest differentials 173
Appendix:linear programming 177
Notes 178
Further reading 179
Quickie questions 180
Problems 180
Introduction to uncertainty 183
9 Uncertainty,risk,diversification and returns 183
Accepting more risks means expecting better returns 184
Dealing with risk 186
Unique and market risk 187
The Capital Asset Pricing Model and Beta 189
Summary 194
Apppendix 195
Further reading 196
Note 196
Quickie questions 197
Problems 197
10 Traditional and technological approaches to risk 199
Introduction 199
Expected net present value 199
The abandonment decision 206
Sensitivity analysis 210
Non-annuity cash flows 212
The risk-adjusted discount rate 214
Use of the normal distribution 217
Simulation 219
A comparison of the approaches 220
Summary 221
Further reading 222
Quickie questions 223
Problems 223
Inroduction 228
11 Overseas capital investments 228
The project cash flows 230
The Project discount rate 233
Translation risk 239
Economic risk 242
Country/political risk 245
Management charges and transfer pricing 246
Summary 247
Notes 248
Further reading 248
Quickie questions 249
Problems 249
TablesCompounding and discount tables(including mid-point discount tables) 251
Atea under the normal curve 255
Natural logarithms 256
Answers to quickie questions 257
Index 271