Cover image for The capital budgeting decision : economic analysis of investment projects
The capital budgeting decision : economic analysis of investment projects
Bierman, Harold.
Personal Author:
Fifth edition.
Publication Information:
New York : Macmillan, [1980]

Physical Description:
xvi, 544 pages ; 25 cm
General Note:
Includes index.
Added Author:
Format :

On Order



Here in its ninth edition, this classic text returns to its roots as a clear and concise introduction to investment decision-making. In this edition, Bierman and Smidt have expanded the theme of adjusting for uncertainty and added a new chapter exploring the use of real options. Retaining the authority and reputation of previous editions, it now covers in depth several under-explored topics, including: distribution policy and capital budgeting; a firm investing in a second firm; investing in current assets. Easily understandable, and covering the essentials of capital budgeting, this book will help readers to make intelligent capital budgeting decisions for corporations of every type. Book jacket.

Author Notes

Harold Bierman, Jr. is the Nicholas H. Noyes Professor of Business Administration at the Johnson Graduate School of Management, Cornell University
Seymour Smidt is Professor Emeritus at the Johnson Graduate School of Management, Cornell University

Table of Contents

List of illustrations
Extracts from preface to the first edition
1 Investment Decisions And Corporate Objectives
Investment decisions
The limitations of quantification
The state of business practice
Time, risk, and the risk-return trade-off
Three basic generalizations
Relevance of cash flows
Cash flows versus earnings
The capital market
The weighted average cost of capital Tactical and strategic decisions
The role of strategic planning
The two capital budgeting revolutions
Pop quiz
Answer to pop quiz
2 The Time Value Of Money
Time discounting Future value Present value
Computing present value factors
Annual equivalent amounts
A growing annuity
A constant interest bond Present value factors derived from market prices
Pop quiz Review problem
Answer to pop quiz
Solution to review problem
Appendix A
Appendix B
3 Capital Budgeting: The Traditional Solutions
A capital budgeting decision Rate of discount
Classification of cash flows
Classifying investments
Measures of investment worth
Two discounted cash flow methods
Net present value profile Payback period
Return on investment
What firms do Cash flows
Working capital
Excluding interest payment
Pop quiz
Review problems
Answers to pop quiz
Solutions to review problems
4 Mutually Exclusive Investments Accept or reject decision
Mutually exclusive investment Incremental benefits: the scale problem Timing
Reinvestment assumption
Reinvestment rate of return Loan-type flows
Multiple internal rates of return
Interpretation of multiple IRRs A "paradox"
Converting multiple IRRs to a single IRR
Significance of nonconventional cash flows
Ranking independent investments
Mutually exclusinve alternatives with different risks
Duration: a sensitivity measure
Why the internal rate of return method is popular
Choosing the required rate of return
Review problem
Solution to review problem
5 Annual equivalent costs and replacement decisions Annual equivalent cost Make or buy decision Comparability
Mutually exclusive alternatives with different lives
Annual equivalent cost Lowest common multiple life
A perpetuity
Components of unequal lives
Cost of excess capacity
The equal cost assumption
The replacement decision
Replacement chains
Review problem
Solution to review problem
6 Capital Budgeting Under
Capital Rationing
External capital rationing
Internal capital rationing
Internal capital rationing and dividend policy
Ranking of investments
Index of present value (or profitability index)
Programming solutions
Capital rationing and risk
7 The Use Of The Weighted Average Cost Of Capital And Other Rates Of Discount
The sources of cash
The cost of retained earnings
A theory of stock values
Changes in stock prices
Accumulated depreciation and the cost of capital
Issuing common stock
Cost of retained earnings: with investor taxes
Cost of new equity capital
Issuing common stock: the element of timing
Delaying the investment
Cost of long-term debt
Cost of short-term debt
Debt and income taxes
Weighted average cost of capital
The optimum capital structure
Summary of weighted average cost of capital
Default-free rate of discount
Adjusting the default-free rate
Comparing average and marginal returns