AMERICAN INTERNATIONAL UNIVERSITY BANGLADESH

Faculty of Business Administration

Department of Finance
BBA Program
COURSE OUTLINE
I Course Code and Title
: Fin- 4004, Capital Budgeting
II Credit
: 3 credit hours
III
Pre-requisites
: Corporate Finance
IV
Course Description
This course examine the firm's investment decisions in projects within the context of value creation. Covers
investment decision making under certainty and under risk. Certainty equivalent, CAPM and risk-adjusted
return, sequential decision making, and sensitivity models are discussed. Problems and cases are assigned
for analysis and class presentation.
V Course Objectives
To learn and apply various aspects of capital budgeting including risk-adjustments in project analysis, the
cost of capital, project and firm valuation, and more sophisticated project analysis techniques.
VI

Topics to be Covered
Topics
Review the
mission and
vision of the
university.
Introduction to
Capital Budgeting
Calculation,
application,
interpretation &
shortcomings of
capital budgeting
tools

Determining
project cash flows
and cost of capital

Time
Suggested
frame
activities
Discussion on Mission & Vision of AIUB
Discussion on the definition of Lectur
Engaging
Capital Budgeting, the steps of e1 & 2
students in
capital investment process & how
discussion
optimum capital budgeting can help
to maximize shareholders wealth.
Specific objective(s)

Calculation, interpretation and

shortcomings of Payback period,
discounted payback period,
Profitability Index, Modified
Profitability Index, Net Present
Value, Internal Rate of return &
modified Internal Rate of Return.
Discussions on selecting the best
capital budgeting tool.
Discussions on the characteristics
of project cash flows and
discussions on the treatment of
sunk cost & opportunity cost,
adjustment of side effects & change
of Net Working Capital in cash flow
determination, adjustment of

Teaching
Strategy(s)
Power point
presentation

Lectur
e
3, 4 &
5

Lecture,
Group
assignments.

Power point
presentation
, Board
works &
Excel.

Lectur
e
6,7,8,9
& 10

Lecture,
Group
assignments,
Case studies

Power point
presentation
, Board
works,
Excel &
Case.

Ranking Mutually
exclusive
Investments

inflation in project evaluation,

determination of cost of capital,
explanations of why earning cost of
capital is important for the firm, and
applying NPV to decide the
attractiveness of the projects.
Discussions on why projects
become mutually exclusive,
discussions on different types of
mutually exclusive projects like
Repair replacement decisions &
abandonment decisions. Use of
Equivalent Annuity (EA) instead of
NPV in case of different project
lives.

Lectur
e11, 12
& 13

Lectur
e14
MIDTERM EXAMINATION
Definition & measurement of risk, Lectur
summary measures of probability
e
distributions,
discussion
and 15,16,
application
of
on
Sensitivity 17 18
analysis, Scenario Analysis, Break& 19
even analysis, Simulation &
Decision tree.
Discussions on the parties involved
Lectur
in lease such as Lessor & Lesse,
e
Discussions on types of lease,
20,21
Calculation and comparison
& 22
between the NPVs of lease and
purchase of an asset.
Reasons for capital rationing,
Lectur
Capital rationing as management
e
policy, A model for capital rationing,
23,24
IRR & capital rationing, PI & capital
& 25
rationing, Selection among mutually
exclusive investments under capital
rationing.
Students at this stage will solve and Lectur
present a comprehensive case in
e 26 &
group.
27
Lectur
Review
e28
FINAL EXAMINATION

Lecture,
Group
assignments,
Case studies

Power point
presentation
, Board
works,
Excel &
Case.

Lecture,
Group
assignments,
Case studies

Power point
presentation
, Board
works,
Excel &
Case.

Lecture,
Group
assignments

Power point
presentation
& Board
works,

Lecture,
Group
assignments

Power point
presentation
& Board
works,

Review

Risk & Investment

Choice

Lease Analysis

Capital rationing

Comprehensive
case analysis

VII

Presentation,
Case analysis

Power point
presentation

Course Requirements
Prior knowledge on basic finance, and accounting specially accounting reporting and disclosure practices
would help students to clearly understand some topics to be covered in the lectures. Students are
strongly advised to frequently check with national and international financial newspapers and magazines
to update their knowledge about corporate governance related issues happening around the world.

Attending in every class is essential since the topics are designed sequentially. Student with attendance
less than 80% would automatically be reported to probationary officer for further action.
VIII

Evaluation
Grades will be calculated as per the university grading structure and individual student will be evaluated
based on the following criteria with respective weights.

Mid Term session

Final session

Mark

Attendance & Participation

10 Attendance & Participation

10

Quiz

10 Quiz

10

Class work case study and

presentation

20

Case study assignment

10 Case study assignment

10

Midterm Examination

50 Final Examination

50

Total

IX

Marks

Class work case study and

presentation

100 Total

20

100

Textbook/Reference Materials
Required text: Neil Seiltz, Mitch Ellision. Capital Budgeting and Long-Term Financing Decisions (3rd
edition), Harcourt Brace College Publishers.
References
Seitz, N., Ellison, M. 2004. Corporate Governance (4th edition), Mason, Ohio: South-Western College
Pub
2 Anand, M., October - December 2002. Corporate Finance Practices in India: A Survey, Vikalpa, Vol.
27, No. 4, pp. 29-56.
3 Baecker, P. N. 2007. Real options and intellectual property capital budgeting under imperfect patent
protection, New York: SpringerLink.
4 Gamba, A., 2003. Real Options Valuation: A Monte Carlo Approach. Faculty of Management,
University of Calgary WP No. 2002/3; EFA 2002 Berlin Meetings Presented Paper.
5 Mian, M. A. and Velez-Pareja, I., 2008. Applicability of the Classic Wacc Concept in Practice, Latin
American Business Review, Vol. 8, No. 2, pp.19-40.
6 Peterson, P. P. & Fabozzi, F. J. 2002. Capital Budgeting: Theory and Practice (1st edition), Wiley:
7 Ross, S. A., Westerfield , R. W., Jaffe, J. 2005. Corporate Finance (7 th edition), New York: Mc.Graw
Hill Irwin.
8 Ross, S. A., Westerfield , R. W., Jordan, B. D. 2003. Fundamentals of Corporate Finance (Standard
edition), New Delhi: Tata Mc.Graw Hill Publishing Company.
9 Shapiro, A. C. 2004. Capital Budgeting and Investment Analysis (1st edition), NJ: Prentice Hall.
10 Velez-Pareja, I., 2001. Project Evaluation in an Inflationary Environment, Cuadernos de
Administracion, Vol. 14, No. 23, pp. 107-130.
1

Prepared by:
Farah Rezwan
Campus 1, Level 4, Ext 124
E-mail: farah.rezwan@aiub.edu