Overview with Objectives:
This unit will show you how a financial manager makes capital investment decisions using financial tools. It is especially the case that this unit addresses the concept of capital budgeting and how to evaluate investment projects using the net present value calculations, internal rate of return criteria, profitability index, and the payback period method. In particular, this unit will teach you how to determine which cash flows are relevant (should be considered) when making an investment decision. Say, for instance, you have been asked to give your recommendation about buying or not buying a new building. As the financial manager, it is your task to identify cash flows that, in some way or another, affect the value of the investment (in this case the building). Also, this unit explains how to calculate "incremental" cash flows when evaluating a new project, which can also be considered as the difference in future cash flows under two scenarios: when a new investment project is being considered and when it is not. Make sure to complete Unit 2 first before engaging in Unit 3 as this unit is considered the advanced portion using the financial techniques that are explained in Unit 2, such as the present and future value formulas.

learning outcome:

• How do firms use money from their capital budgets to invest?
• What is a "project" to a firm?
• How do the firm's decision in which projects to invest?
• How do we compare the NPV of only 2 projects?
• What is depreciation?
• How does one record the depreciation of assets?
• Which financial statements contain depreciation?
• What are the components of the NPV formula?
• How can the NPV formula be modified for changes in cash flows overtime?