Capital Budgeting

Abstract In this chapter, we dive deeper into the capital budgeting process, which is the process of making a list of investment projects to be done. We make these investment decisions more tangible by presenting detailed calculation examples—including the calculation and forecasting of (incremental) cash flows and their drivers. Subsequently, we identify behavioural challenges in the capital budgeting process, such as the tendency to continue poor projects for too long, to underestimate risk, and to overestimate cash flows. Next, we integrate social and environmental factors in the capital budgeting process—integrated capital budgeting. The constrained, expanded, and integrated PVs (introduced in Chap. 6 ) are now shown with cash flow projections. It is shown that FV, SV, and EV can have shared, reinforcing, or conflicting underlying value drivers—and that the way and extent to which they are taken into account affect decisions.