Learning Objectives
                 Lead B2: Explain the steps & pertinent issues in the decision making process.
                 Component B2):Explain:
                 a)  Investment decision-making process
                 b) Discounting
                 c)  Capital investments as real options
                     • Origination of proposals, creation of capital budgets, go/no go decisions.
                     • Time value of money.
                     • Comparing annuities.
                     • Profitability index for capital rationing.
                     • Decision to make follow-on investment, abandon or wait (capex as real 
                       options).
                   Chapter Content
                                           Capital Investment
                                            Capital Investment
                                                Appraisal
                                                 Appraisal
                   Revision of        Discounted
                   Revision of         Discounted          Traditional       The Appraisal
                 Compounding           Cash Flow           Traditional        The Appraisal
                  Compounding          Cash Flow          Techniques            Process
                and Discounting       Techniques           Techniques           Process
                 and Discounting       Techniques
                                    Net     Internal    Pay     Accounting       Post
                                    Net      Internal    Pay     Accounting       Post
                                  Present   Rate of    Back       Rate of     Completion
                                  Present    Rate of    Back       Rate of     Completion
                                   Value    Return     Period     Return         Audit
                                   Value     Return    Period      Return         Audit
                   Capital Investment Process
                                 1. Identify Objectives 
                                  1. Identify Objectives 
                                                                                Creation
                        2. Search for Investment Opportunities                   Creation
                         2. Search for Investment Opportunities                  Phase
                                                                                  Phase
                              3. Identify States of Nature 
                               3. Identify States of Nature 
                               4. List Possible Outcomes 
                               4. List Possible Outcomes 
                                                                                Decision
                                  5. Measure Payoffs                            Decision
                                   5. Measure Payoffs                            Phase
                                                                                  Phase
                             6. Select Investment Projects 
                              6. Select Investment Projects 
                     7. Obtain Authorisation and Implement Projects
                     7. Obtain Authorisation and Implement Projects         Implementation
                                                                             Implementation
                                                                                 Phase
                        8. Review Capital Investment Decisions                    Phase
                        8. Review Capital Investment Decisions 
             Compounding and Discounting Revision
               Compounding                Discounting
                          n       Present = Future x Discount 
               V = X(1+r)         Value      Value     Factor
               Future value              Present value
    Net Present Value (NPV)
    The net benefit or loss in present value terms of an investment 
    opportunity
    Basic decision rule:
        Positive = accept, negative = reject