ABSTRACT
This chapter deals with the concepts involved in evaluating capital investments and shows actual examples of how companies evaluate capital investments. The theory of discounted cash flow has been one of the more difficult concepts to understand. To understand the concept of discounting, it is important to understand compounding. The net present value method calculates the net present values of cash flows using a given discount rate. This discount rate is the rate used as the minimum requirement for all capital investments. Risk applications play an important part in the decision-making process of accepting or rejecting capital investment proposals. It is a technique that takes projected cash flow data and estimates a series of possible results. A major international pharmaceutical company uses specific guidelines for sensitivity analysis to measure the effect on the internal rate of return. The company requires the following calculations be made to cash flows in its sensitivity analysis.
