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Ebook Corporate finance - Principles and practice (5th edition): Part 2

(BQ) Part 2 book "Corporate finance - Principles and practice" has contents: Investment appraisal - applications and risk, portfolio theory and the capital asset pricing model, the cost of capital and capital structure, dividend policy, mergers and takeovers, risk management. | www.downloadslide.com 7 Investment appraisal: applications and risk Learning objectives After studying this chapter, you should have achieved the following learning objectives: ■ an understanding of the influence of taxation on investment decisions and a familiarity with the calculation of tax liabilities and benefits; ■ an understanding of the influence of general and specific inflation on investment decisions; ■ a familiarity with both the real-terms and nominal-terms approaches to investment appraisal under conditions of inflation; ■ an understanding of the distinction between risk and uncertainty; ■ a familiarity with the application of sensitivity analysis to investment projects; ■ a general understanding of the ways in which risk can be incorporated into the investment appraisal process; ■ an understanding of the differences between domestic and international investment appraisal and the ability to evaluate international investment decisions; ■ an appreciation of the general results of empirical research into the capital investment decision-making process. Complete your diagnostic test for Chapter 7 now to create your personal study plan. 189 M01_WATS5251_05_SE_C07.indd 189 11/14/09 4:19:55 PM www.downloadslide.com Chapter 7 Investment appraisal: applications and risk Introduction To make optimal capital investment decisions, the investment appraisal process needs to take account of the effects of taxation and inflation on project cash flows and on the required rate of return since the influence of these factors is inescapable. In addition, expected future cash flows are subject to both risk and uncertainty. In this chapter we consider some of the suggested methods for the investment appraisal process to take these factors into account. We also consider the evaluation of foreign direct investment, which is more complex than the evaluation of domestic investment. Exchange rates will need to be forecast and the effect on project cash flows .