Scanning the business environment

Making well-informed and effective capital investment decisions lies at the heart of any successful business organization. However, prior to investing in a project, an executive/manager should make three key estimates to ensure the viability of a business project: economic useful life of the asset, future cash flows that the project will generate, and the discount rate that properly accounts for the time value of the capital invested and compensates the investors for the risk they bear by investing in that project ( Olsen et al. , 1998 ). Although the first two items are fairly challenging to estimate, the last one is even more challenging. In their book related to cost of capital, Ogier et al. (2004) provided an excellent example which I would like to use to provide a practical introduction to this chapter. I take the liberty to modify the story in accordance with the needs of this chapter.