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CHAPTER 14 Capital Budgeting After completing this chapter, you should be able to answer the following questions: Why do most capital budgeting methods focus on cash flows? What is measured by the payback period? | CHAPTER Capital Budgeting 4 LEARNING OBJECTIVES Ater completing this chapter you should be able to answer the following questions 0 Why do most capital budgeting methods focus on cash flows 0 What is measured by the payback period 0 How are the net present value and profitability index of a project measured 0 How is the internal rate of return on a project computed What does it measure 0 How do taxation and depreciation methods affect cash flows 0 What are the underlying assumptions and limitations of each capital project evaluation method 0 How do managers rank investment projects 0 How is risk considered in capital budgeting analysis 0 How and why should management conduct a postinvestment audit of a capital project 0 Appendix 1 How are present values calculated 0 Appendix 2 What are the advantages and disadvantages of the accounting rate of return method INTRODUCING Amazon.com In a few short years Amazon.com has evolved from an idea to the best-known firm on the Internet. The firm s president Jeff Bezos commands the attention of Wall Street and the financial press. On the morning of September 28 1999 Amazon.com planned to make an announcement significantly affecting the world of e-commerce. The following day Mr. Bezos stepped up to a podium in the Sheraton Hotel in New York. Sixteen months ago Amazon.com was a place where you could find books Bezos began hands folded behind his back as he paced the stage. Tomorrow Amazon.com will be a place where you can find anything. With that he introduced the latest installment of the Amazon potboiler the serialization story of one company s ambitious plan to take over the world the e-commerce world that is. Throughout 1999 Amazon.com has been on the move. On average it has announced a major initiative every six weeks. In February it bought 46 of Drugstore.com. In March it launched online auctions two days after rival eBay announced a secondary stock offering. In May the company took a 35 piece of HomeGrocer.com. In June 54
