Investment Decisions

An investment decision commits resources today in exchange for uncertain future cash flows. This course establishes how to define the project, identify its incremental cash flows and measure the value created by committing capital.

Course purpose

The decision examined

Revenue growth alone does not make an investment worthwhile. The analysis must compare the business with and without the project, include opportunity costs and working capital, and apply a required return consistent with the risk and currency of the cash flows.

Objectives

Learning outcomes

Define a credible without-project case.
Identify after-tax incremental cash flows and their timing.
Interpret NPV as value after remunerating capital at the required return.

Concepts

Key concepts

Incremental cash flow
Opportunity cost
Sunk cost
Working capital
Net present value

Syllabus

Course structure

Investment decision
Baseline case
Incremental cash flows
NPV
Terminal value
Decision limits

Extract

Analytical framework

Measure the value created

For an initial investment I₀, incremental free cash flows FCF_t and required return r, net present value is:

Net present value

NPV = −I₀ + ∑_t=1ⁿFCF_t(1+r)^t

A positive NPV is the surplus remaining after the project has remunerated capital at the required return. It is not cumulative accounting profit and does not guarantee that funding will be available when the project needs it.

Full course

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