Session 10: Capital Budgeting & Investment Decisions

Session 10: Capital Budgeting & Investment Decisions#

Using NPV to decide: Should we build that factory?

Section 1: The Financial Hook - The Billion-Dollar Decision#

You’re on Apple’s capital allocation committee. Tim Cook presents a strategic decision: build a $2 billion advanced semiconductor facility in Texas. The finance team projects:

Project Projections:

Years 1-3: $500M annual operating cash flows (ramp-up period)
Years 4-8: $800M annual operating cash flows (full production)
Years 9-10: $300M annual cash flows (declining technology)
Year 10: $200M facility sale value

Apple’s WACC: 8.5%

Timeline Visualization:

Investment: -\$2B -----> \$500M -----> \$500M -----> \$800M -----> ... -----> \$500M
Today             Year 1      Year 2      Year 4              Year 10
    |               |           |           |                   |
    |<------------- Present Value Analysis ------------------>|

The strategic team argues: “We need this for supply chain independence!” The operations team counters: “We could outsource for less!” Your job: cut through emotions with rigorous financial analysis.

This is capital budgeting—applying TVM framework to the biggest decisions corporations make. Same present value logic from Sessions 1-4, now scaled to multi-billion dollar strategic investments using market-based discount rates from Sessions 6-8.

AI Learning Support - Capital Budgeting Integration with Financial Framework

Learning Goal: Master how capital budgeting synthesizes all previous financial concepts into systematic corporate investment decision-making.

💼 Professional Prompt Sample A (Grade: A): “I’m studying capital budgeting as the culmination of financial analysis: TVM provides the present value mechanics, WACC gives the market-based discount rate, and cash flow analysis determines the investment inputs. My understanding is that NPV transforms strategic investment ideas into objective value creation measurements. This seems to solve the fundamental corporate finance question: which investments create shareholder value? I want to explore the practical challenges: How do corporate finance teams handle estimation uncertainty in long-term cash flows? What systematic approaches do they use to validate their assumptions? How do they balance quantitative NPV analysis with qualitative strategic considerations?”

🎯 Why This Shows Professional Corporate Finance Excellence:

✅ Framework synthesis: Shows comprehensive understanding of financial integration
✅ Value creation focus: Demonstrates shareholder value mindset
✅ Practical implementation: Seeks real-world corporate finance insights
✅ Uncertainty management: Shows professional awareness of estimation challenges

😕 Weak Prompt Sample (Grade: D): “What is capital budgeting and how do you calculate NPV?”

💀 Why This Destroys Your Corporate Finance Career:

❌ No integration thinking: Shows zero understanding of comprehensive framework
❌ Mechanical focus: Misses strategic importance for corporate decisions
❌ No value creation awareness: Cannot connect to shareholder value creation
❌ Basic inquiry level: Uses textbook language instead of professional analysis

🚀 Your Corporate Finance Excellence Challenge: Transform this into a prompt that demonstrates the sophisticated investment analysis and strategic thinking that corporate development teams and CFOs require.

Section 1.5: Quick Knowledge Check#

Instructions: Choose the best answer for each question. Don’t use AI - this is to check what you already know.

Question 1: What is the most important rule for NPV decision-making?

a) Accept all projects with positive cash flows
b) Accept projects where present value of cash inflows exceeds outflows
c) Accept projects with the shortest payback period
d) Accept projects with the highest total returns

Question 2: If a project has NPV of -$50,000, this means:

a) The project will lose $50,000 per year
b) The project destroys $50,000 in shareholder value
c) The project needs $50,000 more investment
d) The project will break even in 50,000 days

Question 3: Which cash flows should be included in NPV analysis?

a) Only operating cash flows
b) All incremental cash flows caused by the project
c) Only positive cash flows
d) Historical cash flows from similar projects

Question 4: What discount rate should typically be used for corporate projects?

a) The risk-free rate
b) The company’s borrowing rate
c) The company’s WACC
d) The inflation rate

Answers: 1-b, 2-b, 3-b, 4-c

Section 2: Foundational Concepts & Formulas#

Part I: Capital Budgeting Framework#

NPV Principle: Accept projects where the present value of cash inflows exceeds the present value of cash outflows. This creates shareholder value by earning returns above the cost of capital.

Key Concepts:

Net Present Value (NPV): Present value of project cash flows minus initial investment
Internal Rate of Return (IRR): Discount rate that makes NPV equal zero
Payback Period: Time required to recover initial investment
Profitability Index: Present value of cash flows divided by initial investment
Hurdle Rate: Minimum acceptable return (typically WACC)

Part II: NPV Calculation and Decision Rules#

Net Present Value Formula: $$NPV = \sum_{t=0}^{n} \frac{CF_t}{(1+r)^t} = -CF_0 + \sum_{t=1}^{n} \frac{CF_t}{(1+r)^t}$$

Where CF₀ = initial investment (negative), CFₜ = cash flow in period t, r = discount rate (WACC)

Decision Rules:

NPV > 0: Accept project (creates shareholder value)
NPV < 0: Reject project (destroys shareholder value)
NPV = 0: Indifferent (earns exactly the cost of capital)

Timeline for Capital Budgeting Process:

Project Identification -----> Cash Flow Estimation -----> NPV Analysis -----> Decision
Strategic planning         Financial modeling          TVM application      Accept/Reject

Post-Implementation -----> Performance Monitoring -----> Learning Application
Project execution         Actual vs. projected       Improve future analysis

Part III: Cash Flow Estimation Principles#

Operating Cash Flow Calculation: $$OCF = (Revenue - Costs - Depreciation) \times (1-T) + Depreciation$$OCF = EBIT \times (1-T) + Depreciation$$

Total Project Cash Flow Components:

Initial Investment: Equipment, working capital, installation costs
Operating Cash Flows: After-tax operating income plus depreciation
Terminal Cash Flow: Asset sale value plus working capital recovery

Part IV: Integration with Course Framework#

Capital Budgeting’s Foundation:

Sessions 1-4: Master TVM mechanics for individual cash flows
Sessions 5-7: Understand risk-return relationships and market pricing
Session 9: Determine appropriate discount rate (WACC)
Session 10: Apply systematic framework to corporate investment decisions

NPV vs. Previous Applications:

Session 2: PV of single cash flow (car purchase)
Session 3: PV of multiple cash flows (stock dividends)
Session 4: PV of fixed cash flows (bond payments)
Session 10: PV of complex business cash flows (corporate projects)

Section 3: The Gym - Partner Practice#

Round 1: Solo Practice (10 minutes)#

Problem 1 (Basic NPV): Project requires $100,000 investment, generates $35,000 annually for 4 years. WACC = 10%. Calculate NPV and make recommendation.

Timeline:

-\$100,000 -----> \$35,000 -----> \$35,000 -----> \$35,000 -----> \$35,000
Today          Year 1        Year 2        Year 3        Year 4
   |              |             |             |             |
   |<------------- Discount at 10% WACC ----------------->|

Problem 2 (Cash Flow Components): Manufacturing project costs $500,000, generates $200,000 annual revenue, $80,000 annual costs, $50,000 annual depreciation. Tax rate = 30%. Calculate annual operating cash flow.

AI Learning Support - NPV Methodology and Value Creation

Learning Goal: Develop deep understanding of why NPV provides the gold standard for corporate investment decisions and shareholder value creation.

💰 Professional Prompt Sample A (Grade: A): “I’m mastering NPV methodology and understand that positive NPV means project returns exceed the cost of capital, creating shareholder value. My analysis framework includes: systematic cash flow estimation, appropriate discount rate selection (WACC), and present value calculation. I want to strengthen my professional application: How do corporate finance teams handle competing projects with different NPVs and scales? What sensitivity analysis approaches do they use to test assumption robustness? How do they communicate NPV analysis to non-financial stakeholders and boards? What are the key limitations of NPV that professional analysts must acknowledge?”

📊 Why This Shows Professional Investment Analysis Skills:

✅ Value creation understanding: Shows sophisticated grasp of NPV’s economic meaning
✅ Systematic methodology: Demonstrates structured analytical approach
✅ Stakeholder communication: Shows awareness of presentation challenges
✅ Limitation recognition: Demonstrates professional skepticism and humility

🤷 Weak Prompt Sample (Grade: D): “How do you calculate NPV and why is positive NPV good?”

💸 Why This Kills Your Investment Analysis Credibility:

❌ No economic understanding: Shows zero grasp of value creation concepts
❌ Mechanical computation: Cannot explain business significance
❌ No professional awareness: Misses corporate application context
❌ Superficial inquiry: Lacks analytical depth for corporate finance roles

🏆 Your Investment Excellence Challenge: Transform this into a prompt that demonstrates the comprehensive NPV analysis and corporate finance skills that investment committees and senior management require.

Round 2: Peer Teaching (15 minutes)#

Person A explains NPV calculation and why positive NPV creates shareholder value
Person B explains operating cash flow calculation and tax effects
Both discuss how capital budgeting connects to Sessions 1 and 8

Round 3: Challenge Problems (15 minutes)#

Problem 3 (Competing Projects): Two mutually exclusive projects:

Project A: $80,000 investment, $25,000 for 5 years, NPV = $14,570
Project B: $120,000 investment, $35,000 for 5 years, NPV = $12,860 Which should you choose and why?

Problem 4 (Working Capital): Project requires $200,000 equipment plus $30,000 additional inventory. Equipment depreciates over 5 years, inventory recovered at project end. Annual operating cash flow = $60,000. WACC = 12%. Calculate NPV.

Problem 5 (IRR Analysis): Project with $-150,000 initial cost and $40,000 annual cash flows for 5 years has IRR = 15.2%. WACC = 12%. Should you accept? What if WACC = 18%?

AI Learning Support - Advanced Capital Budgeting Metrics and Decision Frameworks

Learning Goal: Master the relationship between different investment metrics and understand when each provides the most valuable insight for corporate decision-making.

📈 Professional Prompt Sample A (Grade: A): “I’m analyzing the relationship between NPV, IRR, and payback period for investment decisions. My understanding is that NPV provides absolute value creation, IRR shows the project’s inherent return rate, and payback indicates capital recovery speed. Each metric answers different questions for management teams. I want to deepen my professional application: When might IRR and NPV give conflicting recommendations? How do corporate finance teams handle mutually exclusive projects with different scales and timing? What role should payback period play in capital allocation decisions? How do they present these metrics to different stakeholder groups?”

🎯 Why This Shows Advanced Corporate Finance Understanding:

✅ Multi-metric integration: Shows sophisticated understanding of different analytical perspectives
✅ Conflict resolution awareness: Demonstrates professional analytical maturity
✅ Stakeholder perspective: Shows understanding of diverse decision-maker needs
✅ Scale and timing considerations: Demonstrates complex investment analysis capability

😐 Weak Prompt Sample (Grade: D): “What’s the difference between NPV and IRR? Which one is better?”

💀 Why This Shows Limited Investment Sophistication:

❌ Binary thinking: Shows zero understanding of complementary analytical value
❌ No practical context: Cannot connect to corporate decision-making scenarios
❌ Superficial comparison: Misses deeper analytical integration opportunities
❌ Amateur perspective: Lacks professional investment analysis framework

🌟 Your Investment Mastery Challenge: Transform this into a prompt that demonstrates the multi-metric investment analysis and corporate finance sophistication that senior analysts and investment committees possess.

Debrief Discussion#

Why might profitable projects (positive accounting income) still have negative NPV?

Section 4: The Coaching - Your DRIVER Learning Guide#

Let’s apply DRIVER to a comprehensive capital budgeting analysis, integrating all your TVM and corporate finance knowledge.

Case Scenario for Coaching: Electric vehicle charging network expansion. ChargePoint Corp evaluates $50M network deployment: 500 charging stations at $100K each. Projections: Year 1-2: $8M annual cash flows, Year 3-7: $15M annual cash flows, Year 8-10: $12M declining cash flows, Year 10: $5M salvage value. WACC = 11%. Additional: $3M working capital required, recovered at project end.

Investment Framework:

Initial Investment: \$50M equipment + \$3M working capital = \$53M

Cash Flow Pattern: Growing then declining over 10-year horizon

Terminal Recovery: \$5M salvage + \$3M working capital = \$8M

Decision: NPV analysis using 11% WACC hurdle rate

The DRIVER Playbook in Action#

D - Discover: Frame the Strategic Investment Decision#

Goal: Structure comprehensive capital budgeting analysis for major infrastructure project. Action: Use AI to understand all components of complex project evaluation.

✅ DO THIS with AI:

"Act as a corporate finance analyst evaluating major infrastructure investment.
Project: \$50M charging network, complex cash flow pattern over 10 years, 11% WACC hurdle rate.
Before calculating, help me understand: What are all the cash flow components I must include for accurate NPV analysis?"

❌ DON’T DO THIS:

“Calculate the project NPV for me”
“Tell me whether to approve this investment”

Outcome: Need to include initial equipment cost, working capital requirements, operating cash flows with growth patterns, tax effects, depreciation benefits, and terminal value recovery. Must apply 11% WACC consistently across all future cash flows.

R - Represent: Map the Complex Cash Flow Structure#

Goal: Visualize multi-period investment with varying cash flow patterns. Action: Create comprehensive timeline showing all project cash flows.

Capital Budgeting Timeline:
Year 0: \$50M (equipment) \$3M (working capital) = \$53M total investment

Operating Cash Flows:
Years 1-2: \$8M annually (network building phase)
Years 3-7: \$15M annually (mature operation phase)  
Years 8-10: \$12M annually (declining phase)

Terminal Recovery (Year 10):
\$5M salvage value + \$3M working capital recovery = \$8M additional

NPV Calculation:
NPV = \$-53M + Σ[OCFₜ ÷ (1.11)ᵗ] + \$8M ÷ (1.11)¹⁰

✅ DO THIS with AI:

"Review my capital budgeting framework: 10-year project with varying cash flows and terminal recovery. 
Does this structure capture all relevant cash flows for accurate NPV analysis?"

I - Implement: Code the Capital Budgeting Analysis#

Goal: Build comprehensive NPV model with sensitivity analysis and decision framework. Action: Create professional-level capital budgeting tool.

# IMPORTANT: This code is a starting point - understand the logic, don't copy-paste. 
# Explain each step to your partner. Code may contain errors - debug with AI copilot.

# Basic NPV calculation for ChargePoint charging network
initial_equipment = 50000000  # \$50M charging stations
working_capital = 3000000     # \$3M additional inventory/working capital
wacc = 0.11                   # 11% weighted average cost of capital
salvage_value = 5000000       # \$5M equipment salvage value

# Cash flow projections by phase
cash_flows_1_2 = 8000000     # Years 1-2: Network building phase
cash_flows_3_7 = 15000000    # Years 3-7: Mature operations phase  
cash_flows_8_10 = 12000000   # Years 8-10: Declining phase

# Year 0: Initial investment
total_initial_investment = initial_equipment + working_capital
npv = -total_initial_investment
print(f"Initial Investment: ${total_initial_investment:,.0f}")

# Years 1-2: Building phase
for year in range(1, 3):
    pv = cash_flows_1_2 / (1 + wacc) ** year
    npv += pv
    print(f"Year {year}: ${cash_flows_1_2:,.0f}, PV = ${pv:,.0f}")

# Years 3-7: Mature phase
for year in range(3, 8):
    pv = cash_flows_3_7 / (1 + wacc) ** year
    npv += pv
    print(f"Year {year}: ${cash_flows_3_7:,.0f}, PV = ${pv:,.0f}")

# Years 8-10: Declining phase
for year in range(8, 11):
    annual_cf = cash_flows_8_10
    if year == 10:
        # Add terminal recovery in final year
        annual_cf += salvage_value + working_capital
    pv = annual_cf / (1 + wacc) ** year
    npv += pv
    print(f"Year {year}: ${annual_cf:,.0f}, PV = ${pv:,.0f}")

print(f"\nNet Present Value: ${npv:,.0f}")

if npv > 0:
    print("RECOMMENDATION: ACCEPT the project (creates shareholder value)")
else:
    print("RECOMMENDATION: REJECT the project (destroys shareholder value)")

# Simple sensitivity analysis
print(f"\nSensitivity Analysis:")
for wacc_test in [0.08, 0.09, 0.10, 0.11, 0.12, 0.13, 0.14]:
    # Recalculate NPV with different WACC
    npv_test = -total_initial_investment
    
    # Years 1-2
    for year in range(1, 3):
        npv_test += cash_flows_1_2 / (1 + wacc_test) ** year
    
    # Years 3-7
    for year in range(3, 8):
        npv_test += cash_flows_3_7 / (1 + wacc_test) ** year
    
    # Years 8-10
    for year in range(8, 11):
        annual_cf = cash_flows_8_10
        if year == 10:
            annual_cf += salvage_value + working_capital
        npv_test += annual_cf / (1 + wacc_test) ** year
    
    status = "Accept" if npv_test > 0 else "Reject"
    print(f"WACC {wacc_test:.0%}: NPV = ${npv_test:,.0f} ({status})")

✅ DO THIS with AI:

"Review my capital budgeting analysis: comprehensive NPV model with sensitivity testing for major infrastructure project. 
Does this demonstrate proper application of capital budgeting principles to corporate investment decisions?"

AI Learning Support - Complex Cash Flow Analysis and Infrastructure Investment

Learning Goal: Master systematic approaches to analyzing complex investment projects with multiple phases, varying cash flows, and long time horizons.

🏗️ Professional Prompt Sample A (Grade: A): “I’m analyzing complex infrastructure investment with multi-phase cash flows: initial building phase (Years 1-2), mature operations (Years 3-7), and declining phase (Years 8-10), plus terminal value recovery. This pattern requires careful consideration of: working capital timing, depreciation tax benefits, salvage value estimation, and appropriate discount rate application. How do corporate finance professionals handle the increased uncertainty in longer-term projections? What scenario analysis frameworks help assess infrastructure investment robustness? How do they validate terminal value assumptions for long-lived assets?”

🏭 Why This Shows Professional Infrastructure Finance Skills:

✅ Multi-phase understanding: Shows sophisticated grasp of complex investment patterns
✅ Tax effect integration: Demonstrates comprehensive cash flow analysis
✅ Long-term uncertainty awareness: Shows professional risk management thinking
✅ Validation methodology: Seeks systematic approaches to assumption testing

😟 Weak Prompt Sample (Grade: D): “How do you calculate NPV for projects with different cash flows each year?”

💸 Why This Shows Basic Analytical Capability:

❌ No complexity recognition: Shows zero understanding of infrastructure investment challenges
❌ Mechanical focus: Cannot handle sophisticated cash flow patterns
❌ No uncertainty awareness: Misses long-term projection challenges
❌ Simplistic approach: Lacks professional analytical sophistication

🚀 Your Infrastructure Finance Excellence Challenge: Transform this into a prompt that demonstrates the complex project analysis and long-term investment evaluation skills that infrastructure finance professionals possess.

V - Validate: Capital Budgeting Model Verification#

Goal: Ensure investment analysis captures all relevant factors and uses appropriate methodology. Action: Cross-check assumptions and validate decision framework.

Cash Flow Verification: Are all relevant inflows and outflows included?
Discount Rate Appropriateness: Does 11% WACC reflect project risk?
Sensitivity Robustness: How sensitive is decision to key assumptions?
Strategic Consistency: Does quantitative analysis align with strategic objectives?

✅ DO THIS with AI:

"Help me validate this capital budgeting analysis: NPV of \$X for \$50M charging network investment. 
What additional checks ensure this analysis supports sound investment decision-making?"

E - Evolve: Capital Budgeting Applications#

Goal: Recognize NPV framework across all major corporate investment decisions. Action: Identify systematic capital allocation applications.

Capital Budgeting Applications:

Session 10 (Project Evaluation): Individual investment analysis

Session 11 (Strategic Finance): Portfolio of investments and financing decisions

Session 12 (Business Valuation): Entire company as collection of projects

Session 13 (Integration): Comprehensive strategic and financial analysis

NPV methodology provides the foundation for all corporate capital allocation and strategic decision-making.

R - Reflect: Investment Decision-Making Insights#

Goal: Extract principles about how corporations should systematically evaluate investments. Action: The ChargePoint analysis demonstrates how NPV provides objective criteria for major business investments, cutting through strategic arguments to focus on shareholder value creation. By systematically discounting all future cash flows at the cost of capital, management can make consistent, defensible investment decisions that align with shareholder interests while supporting long-term business strategy.

Section 5: Class Discussion & Reflection#

AI Learning Support - Capital Budgeting Integration and Strategic Decision-Making

Learning Goal: Synthesize capital budgeting mastery within the broader context of corporate strategy and systematic value creation.

🎯 Professional Prompt Sample A (Grade: A): “I’ve mastered systematic capital budgeting and understand how NPV analysis provides objective criteria for investment decisions, cutting through emotional and political considerations to focus on shareholder value creation. This framework transforms strategic ideas into measurable value propositions. I want to explore advanced applications: How do multi-business companies apply capital budgeting across different divisions with varying risk profiles? How do they balance short-term financial returns with long-term strategic positioning? What role does capital budgeting play in M&A evaluation and post-acquisition integration? How do boards oversee capital allocation processes?”

💼 Why This Shows Strategic Corporate Finance Leadership:

✅ Value creation synthesis: Shows comprehensive understanding of NPV’s strategic importance
✅ Multi-business complexity: Demonstrates sophisticated corporate structure awareness
✅ Strategic balance perspective: Shows advanced business judgment integration
✅ Governance awareness: Demonstrates board and senior management perspective

🤔 Weak Prompt Sample (Grade: D): “What are the main things to remember about capital budgeting and NPV?”

💀 Why This Shows Limited Strategic Thinking:

❌ No strategic integration: Shows zero understanding of business applications
❌ Memorization focus: Cannot apply capital budgeting to real decisions
❌ No governance awareness: Misses corporate decision-making context
❌ Basic summary thinking: Lacks strategic business perspective

🏆 Your Strategic Excellence Challenge: Transform this into a prompt that demonstrates the strategic thinking and corporate finance leadership that C-suite executives and board members require.

Individual Reflection (5 minutes)#

Complete this statement: “The most important insight about capital budgeting decision-making was…”

Reflection Quiz#

Take 2 minutes to think about these questions:

Why might a project with positive accounting profits still have negative NPV?
How does the choice of discount rate affect investment decisions?
When might qualitative factors override quantitative NPV analysis?

Pair Discussion (10 minutes)#

Share your reflection, then discuss:

How does NPV analysis balance quantitative rigor with strategic judgment?
When might projects with negative NPV still be worth pursuing?
How should risk and uncertainty affect capital budgeting decisions?

Class Synthesis (5 minutes)#

Three volunteers share insights about systematic investment decision-making.

Section 6: Assignment - Cost of Capital Analysis#

Assignment Overview#

Evaluate Starbucks’ proposed flagship roastery that requires a $12 million upfront outlay and is expected to operate for 10 years. Use the firm’s 8.5% WACC as the hurdle rate to determine whether the project creates value and to recommend an accept/reject decision supported by DRIVER documentation.

Project Parameters

Initial investment: $12 million (building, equipment, training) depreciated straight-line over 10 years
Working capital: $500,000 deployed at launch and recovered in Year 10
Revenues: $8 million in Year 1, $11 million in Years 2-5, $9 million in Years 6-10
Operating costs: COGS 40% of revenue, labor $2.5 million, rent & utilities $0.8 million, marketing $0.3 million in Year 1 then $0.1 million thereafter
Taxes: 25% corporate rate; terminal value $3 million at end of Year 10

Focus your analysis on producing a transparent cash-flow model, core capital budgeting metrics, sensitivity tests, and an executive-ready recommendation.

DRIVER Framework Requirement#

DRIVER is your analytical work process.

You must begin with Define & Discover, plan in Represent, and only then implement, validate, evolve, and reflect. Document each stage sequentially and show how the work progressed rather than retroactively describing a finished model.

Submission Requirements

Video presentation that walks through every DRIVER stage while demonstrating the model

Assignments missing clear Define & Discover evidence before implementation receive an automatic zero per the DRIVER guidelines.

Specific Requirements#

Financial Analysis Requirements#

Build a Year 0–10 incremental cash-flow schedule that includes revenue, operating costs, depreciation tax shields, taxes, working capital changes, and terminal value.
Calculate NPV, IRR, discounted payback period, simple payback period, and profitability index using Starbucks’ WACC.
Run sensitivity analysis for (a) revenue reduced by 20% and (b) WACC ±2%, and summarize the impact on NPV/IRR.
Provide a recommendation that weighs financial results, strategic fit, brand implications, and key project risks.

Technical Requirements#

Use Python to automate cash-flow construction, metric calculation, and scenarios.
Parameterize assumptions so that revenue, cost, and discount-rate inputs can be updated easily.
Visualize cash flows and at least one sensitivity output to support the narrative.

Deliverables#

Video Presentation that narrates the DRIVER journey, shows the code executing, and connects insights to capital budgeting concepts.

Assessment#

Total: 100 points

1. Financial Concepts Accuracy (50 points)#

Correct application of WACC as the discount rate and articulation of the NPV decision rule.
Accurate computation of operating cash flows, depreciation tax shields, terminal value treatment, and profitability index.
Sound interpretation of NPV, IRR, and sensitivity outputs when forming the recommendation.

2. Technical Implementation (10 points)#

Reproducible code that runs end-to-end without errors.
Transparent modeling structure with clear assumptions and intermediate calculations.

3. Integration of Finance and Technology (20 points)#

Data-driven insights with analysis such as scenario charts, parameter sweeps, and sensitivity analysis.
Linkage between computed results and managerial conclusions.

4. Following the DRIVER Framework (10 points)#

Evidence of disciplined progression through every DRIVER stage and reflection on analytical learning.
Critical Gate: Missing Define & Discover documentation before implementation results in zero credit.

5. Clear Communication and Explanation (10 points)#

Professional narrative in the video and documentation.
Cohesive storyline that connects the problem, method, results, and recommendation.

Section 7: Looking Ahead - From Project Analysis to Corporate Strategy#

Session Preview#

Capital budgeting provides the analytical foundation for Session 11’s exploration of how financing decisions and stakeholder conflicts affect investment attractiveness.

Strategic Integration:

Session 10: Individual project NPV analysis
           ↓
Session 11: How financing choices and stakeholder conflicts affect project value
           ↓
Session 12: Portfolio approach to multiple projects and business units

Corporate Finance Evolution:

NPV Foundation: Systematic project evaluation framework
                ↓
Financing Integration: How capital structure affects project attractiveness
                      ↓
Strategic Synthesis: Complete business decision-making framework

Session 11 Preview: “Should Tesla finance its gigafactory expansion with debt or equity? How do financing decisions affect investment strategy and stakeholder relationships?”

You can now systematically evaluate investment opportunities. Next, you’ll explore how the choice of financing affects both project attractiveness and stakeholder incentives.

AI Learning Support - Capital Budgeting Foundation for Advanced Corporate Finance

Learning Goal: Understand how capital budgeting mastery enables progression to advanced corporate finance topics and integrated strategic decision-making.

🎯 Professional Prompt Sample A (Grade: A): “I’ve mastered capital budgeting as the foundation for corporate investment decisions and can see how it enables advanced applications: optimal capital structure decisions use NPV to evaluate financing alternatives, M&A analysis applies NPV to entire companies, strategic planning uses capital budgeting for portfolio resource allocation, and performance measurement compares actual returns to NPV projections. My question is about integration: How do senior corporate finance professionals seamlessly move between project-level and enterprise-level analysis? What framework helps them recognize when capital budgeting assumptions need adjustment for different contexts? How does NPV expertise contribute to strategic business partnership with operations and strategy teams?”

💼 Why This Shows Advanced Corporate Finance Integration:

✅ Multi-level application: Shows understanding of NPV’s broad utility
✅ Enterprise perspective: Demonstrates senior analytical awareness
✅ Cross-functional thinking: Shows business partnership capabilities
✅ Framework adaptation: Seeks sophisticated analytical flexibility

🤷 Weak Prompt Sample (Grade: D): “How does capital budgeting connect to other corporate finance topics?”

💀 Why This Shows Limited Integration Thinking:

❌ No synthesis capability: Shows zero advanced analytical preparation
❌ Passive learning approach: Cannot build conceptual connections
❌ Basic inquiry level: Lacks sophisticated financial framework thinking
❌ No professional context: Misses career development opportunities

🏆 Your Integration Excellence Challenge: Transform this into a prompt that demonstrates the advanced analytical integration and strategic thinking that corporate finance leaders possess.

Session 10: Capital Budgeting & Investment Decisions

Contents

Session 10: Capital Budgeting & Investment Decisions#

Section 1: The Financial Hook - The Billion-Dollar Decision#

Section 1.5: Quick Knowledge Check#

Section 2: Foundational Concepts & Formulas#

Part I: Capital Budgeting Framework#

Part II: NPV Calculation and Decision Rules#

Part III: Cash Flow Estimation Principles#

Part IV: Integration with Course Framework#

Section 3: The Gym - Partner Practice#

Round 1: Solo Practice (10 minutes)#

Round 2: Peer Teaching (15 minutes)#

Round 3: Challenge Problems (15 minutes)#

Debrief Discussion#

Section 4: The Coaching - Your DRIVER Learning Guide#

The DRIVER Playbook in Action#

D - Discover: Frame the Strategic Investment Decision#

R - Represent: Map the Complex Cash Flow Structure#

I - Implement: Code the Capital Budgeting Analysis#

V - Validate: Capital Budgeting Model Verification#

E - Evolve: Capital Budgeting Applications#

R - Reflect: Investment Decision-Making Insights#

Section 5: Class Discussion & Reflection#

Individual Reflection (5 minutes)#

Reflection Quiz#

Pair Discussion (10 minutes)#

Class Synthesis (5 minutes)#

Section 6: Assignment - Cost of Capital Analysis#

Assignment Overview#

DRIVER Framework Requirement#

Specific Requirements#

Financial Analysis Requirements#

Technical Requirements#

Deliverables#

Assessment#

1. Financial Concepts Accuracy (50 points)#

2. Technical Implementation (10 points)#

3. Integration of Finance and Technology (20 points)#

4. Following the DRIVER Framework (10 points)#

5. Clear Communication and Explanation (10 points)#

Section 7: Looking Ahead - From Project Analysis to Corporate Strategy#

Session Preview#