Cap. Budget

Net Present Value and Capital Budgeting
Course Module in Introductory Finance

Course Modules help instructors select and sequence material for use as a part of a course. Each module
represents the thinking of subject matter experts about the best materials to assign and how to organize
them to facilitate learning.
Each module recommends four to six items. Whenever possible at least one alternative item for each
main recommendation is included, as well as suggested supplemental readings that may provide a
broader conceptual context. Cases form the core of many modules but we also include readings from
Harvard Business Review, HBS background notes, and other course materials.
1. Overview of suggested content (HBS case unless otherwise noted)
Title Author Product Publication Pages Teaching Note

Number Year
1. Time Value of Money Introduction
Buying Time Kaplan 104708 2005 -- --
(HBS online tutorial)
Alternative: Introduction to Hammond 173003 1972 10p --
Accumulated Value, Present
Value, and Internal Rate of
Return
2. Exercises
Valuing Capital Investment Kester 298092 1997 5p 204152
Projects
Alternative: Tree Value Ruback 201031 2000 3p 202018
3. Net Present Value

Stryker Corp.: In-sourcing Luehrman 207121 2007 6p 209156
PCBs
Alternative: New Heritage Luehrman & 4212 2010 8p 4213
Doll Company Abelli
(HBP Brief case)
4. Cash Flow Forecasting
Expansion and Risk at Piper & 4021 2009 32p 4024
Hansson Private Label, Inc.: DeVolder
Evaluating Investment in the
Goliath Facility
(HBP Brief case)
Alternative: Ocean Carriers Stafford 202027 2001 6p 202029
5. Capital Budgeting and Policy
Stryker Corporation: Capital Luehrman 208046 2007 11p --
Budgeting
Alternative: Target Eades, Ding, UV1057 2008 20p UV1058
Corporation (Darden case) & Yeaton
II. Rationale for selection and sequencing the items in this module
Both of the suggestions in Section 1 provide an intuitive overview of the basic concepts and terminology
of project valuation. Each selection covers the time value of money, discounted cash flows, net present
value, and internal rates of return. The Buying Time tutorial is an interactive multimedia presentation that
provides examples from both personal and corporate finance. It equals one to two hours of homework.
The alternative, a traditional paper note, Introduction to Accumulated Value, Present Value, and Internal
Rate of Return, first presents the concepts and then derives the net present value formula and calculation
mechanics.
Section 2 gives students the opportunity to practice the theory and mechanics presented in the first
section in simplified contexts. Valuing Capital Investment Projects presents four problems that can be
completed in a single class, arranged according to ascending difficulty, to show students how to apply
discounted cash flow methods to capital budgeting. The alternative, Tree Values, focuses on a logging
company’s decision on the optimal time to cut trees. Students must rank three mutually-exclusive forest
management strategies to maximize value.
The contexts get more complicated in Section 3. Stryker Corporation: In-Sourcing PCBs examines a
proposed investment in the capability to manufacture printed circuit boards (PCBs) in-house rather than
buying them from third-party contract manufacturers. Students must estimate incremental cash flows,
terminal value, and discounting, and compare NPV, IRR, and payback periods as investment criteria
within the context of a business case that targets risk reduction, not increasing profits or cash flow. The
alternative, the HBP Brief Case New Heritage Doll, requires students to evaluate two projects and decide
which to recommend to the company’s capital committee. Students must estimate the incremental debt-
free cash flows for each of the projects, determine terminal values, assign discount rates, and calculate
the NPV, IRR, and payback period. There is an Excel spreadsheet supplement available for the case
(4214), and an HBP online simulation based on the case, Finance Simulation: Capital Budgeting (3357),
a more comprehensive look at the same capital budgeting process, with 27 instead of two projects to
evaluate.
Section 4 emphasizes the factors that can make forecasting cash flows difficult. In Expansion and Risk at
Hansson Private Label, Inc.: Evaluating Investments in the Goliath Facility, a HBP Brief Case, a
manufacturer of private-label personal care products must decide whether to fund an unprecedented
expansion of manufacturing capacity. Students must forecast cash flows taking into account the
requirements of working capital, and while they need not calculate the opportunity cost of capital or
WACC, they are introduced to these concepts and the tax advantages of debt. The case also facilitates a
systematic consideration of the company's capital planning process. The alternative, Ocean Carriers,
evaluates the lease and possible scrapping of a ship, involving net working capital, asset sale, and tax
treatment issues in forecasting cash flows. In the economics of the shipping industry, demand for services
is quite volatile in the short-term, while capacity can adjust only long-term.
Section 5 revisits the same Stryker Corporation featured earlier for a more comprehensive look at its
capital budgeting process, including its systems and procedures for approving and authorizing capital
spending of many types. The alternative, Target Corporation, a Darden case, also looks at the capital
budgeting process as the CFO and other senior staff try to decide which five of the ten projects on the
table deserve higher priority, trying to balance the raw NPV numbers with longer-term strategic
considerations.
For instructors looking for capital budgeting cases involving the Capital Asset Pricing Model (CAPM) and
Weighted Average Cost of Capital (WACC) concepts, see the module on Risk, Return, and Capital
Budgeting.

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Net Present Value and Capital Budgeting

Course Module in Introductory Finance

1. Overview of suggested content (HBS case unless otherwise noted)

Title Author Product Publication Pages Teaching Note

3. Net Present Value

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