class 12: Capital Budgeting, liz motor corp case

Capital Budgeting Overview

• Capital budgeting involves searching for investment opportunities amidst varying processes among firms/industries.

• Essential steps include estimating cash flows, evaluation (Payback Period, Net Present Value, Internal Rate of Return), and making acceptance decisions.

Incremental Cash Flows

• Incremental cash flows: changes in after-tax cash flows relevant to project acceptance versus rejection.

• Initial outlay includes costs such as the asset purchase price and additional working capital investments.

• Relevant cash flows: directly attributable to the project; excludes sunk costs and is assessed over the project’s life.

Hurdle Rate Definition

• Also known as Required Rate of Return or Minimum Acceptable Rate of Return (MARR).

• Reflects the minimum expected return to consider a project viable; acts as a benchmark for evaluating project returns.

Climate Risk Management in SEC Rules

• Companies must disclose climate risk management and governance strategies in registration statements and 10-K forms.

• Scope 1 & 2 emissions need reporting, with focus on greenhouse gas emissions.

• Key amendments include removal of certain disclosures and the introduction of a safe harbor for transition plans.

Case Study: Liz Motor Corp

• The company aims to develop solid-state batteries for EVs amidst rising competition and regulatory challenges.

• Financial considerations include project costs and uncertainties affecting financing; non-financial benefits include enhanced corporate image and social capital.