Capital Budgeting Valuation

DAVID L. H. KENT BAKER, PHD, CFA, CMA, is University Professor of Finance and Kogod Research Professor at the Kogod School of Business at American University, Washington, D.C. He has published extensively in leading academic and professional finance journals including the Journal of Finance, Journal of Financial and Quantitative Analysis, Financial Management, Financial Analysts Journal, and Journal of Portfolio Management. Recognized as one of the most prolific authors in finance during the past fifty years, Professor Baker has consulting and training experience with more than 100 organizations and has been listed in fifteen biographies. PHILIP ENGLISH is an Assistant Professor of Finance and Real Estate at the Kogod School of Business, American University. He currently serves as Director of the Master of Science in Finance and Master of Science in Real Estate programs. Before pursuing a doctorate, English worked as the primary financial officer and director of product development for Campbell Classics, a Virginia-based manufacturing firm. Professor English's research interests focus on the role of the legal environment in emerging markets, corporate governance, and mutual fund regulation. He has published in the Journal of Financial Research, Journal of Corporate Finance, Journal of Law and Economics, and Emerging Markets Review.

• Acknowledgments ix1 Capital Budgeting: An Overview 1H. Kent Baker and Philip EnglishPart I Foundation and Key Concepts 172 Corporate Strategy and Investment Decisions 19Daniel Ferreira3 Corporate Governance and Investment Decisions 37Fodil Adjaoud, Dorra Charfi, and Lamia ChourouPart II Capital Investment Choice 574 Measuring Investment Value: Free Cash Flow, Net Present Value, and Economic Value Added 59Tom Arnold and Terry Nixon5 Alternative Methods of Evaluating Capital Investments 79Tom Arnold and Terry Nixon6 Capital Rationing for Capital Budgeting 95Alexander Brüggen7 Analyzing Foreign Investments 111Wim Westerman and John Henry Hall8 Postcompletion Auditing of Capital Investments 131Jari Huikku9 Capital Budgeting Techniques in Practice: U.S. Survey Evidence 151Tarun K. Mukherjee and Naseem M. Al RahahlehPart III Project Cash Flows and Inflation 17310 Estimating Project Cash Flows 175Kyle Meyer and Halil Kiymaz11 Capital Budgeting and Inflation 197Ignacio Vélez-Pareja and Joseph ThamPart IV Risk and Investment Choice 21512 Basic Risk Adjustment Techniques in Capital Budgeting 217John H. Hall and Wim Westerman13 Capital Budgeting with Political/Country Risk 241Yacine Belghitar and Ephraim Clark14 Risk Management in Project Finance 259Stefano Gatti and Stefano Caselli15 Risk Simulation Concepts and Methods 279Tom Arnold and David NorthPart V Real Options and Project Analysis 29916 Real Options Analysis: An Introduction 301Tom Arnold and Bonnie Buchanan17 Applications of Real Options Analysis 321Tom Arnold and Bonnie BuchananPart VI Estimating the Project Cost of Capital 33718 Cost of Capital: An Introduction 339Octavian Ionici, Kenneth Small, and Frank D’Souza19 Using the Capital Asset Pricing Model and Arbitrage Pricing Theory in Capital Budgeting 363S. David Young and Samir Saadi20 Financing Mix and Project Valuation: Alternative Methods and Possible Adjustments 381Alex Pierru and Denis BabusiauxPart VII Special Topics 40321 Capital Budgeting for Government Entities 405Davina F. Jacobs22 Decision Making Using Behavioral Finance for Capital Budgeting 421Yuri Biondi and Giuseppe Marzo23 Merger and Acquisition Pricing: The Valuation of Synergy 445Rainer Lenz24 Multicriteria Analysis for Capital Budgeting 463Fernando R. FernholzAnswers to Discussion Questions 483Index 507