Capital Investments and Capital Allocation

Mastering Capital Investments for the CFA Level 1 Exam

Welcome to the world of Capital Investments, where we’ll unravel the mysteries of allocating funds for business growth! Ready to become a capital allocation aficionado? Let’s dive in!

The Capital Allocation Process

Dive into the world of capital allocation, unravel its practical uses, and grasp the nitty-gritty of its processes. Know the ropes of identifying and evaluating projects that can shape the future of a firm, and relate these principles to strategic decisions like working capital management, mergers, and acquisitions. You’ll also learn to generate profitable project ideas, conduct a firm-wide budget, and monitor project outcomes, all towards the ultimate goal of maximizing shareholder value.

► Ready to be the maestro of capital allocation? Click here.

Basic Principles of Capital Allocation

Learn the ins and outs of capital allocation principles, like prioritizing cash flows, considering opportunity costs, and accounting for after-tax implications. Gain insights on sunk costs, externalities, independent versus mutually exclusive projects, and the significance of project sequencing. Tackle capital rationing challenges and sharpen your project evaluation skills to elevate your financial management game.

► Ready to dominate capital allocation fundamentals? Click here.

Investment Decision Criteria

Discover the power of NPV and IRR in making smart investment decisions, and how these can affect a company’s share price and Return on Invested Capital (ROIC). Plus, we’ll walk you through the process of calculating NPV and IRR using a financial calculator, so you’ll be well-prepared for any exam or real-life scenario!

► Test your understanding of NPV and IRR with our interactive exercises here.

Common Pitfalls in Capital Budgeting

Unpack the common mistakes managers make when deciding on capital budgets, from overlooking economic responses to misusing standardized templates. Learn about the pitfalls of prioritizing IRR over NPV, making investment decisions based on EPS or ROE, and mishandling sunk and opportunity costs.

► Avoid these blunders! Apply your knowledge with our interactive capital budgeting decision-making exercise here.

Real Options

Gain insights into the world of real options, understanding their similarities with financial options, and the edge they bring to capital budgeting decisions. Grasp the different types of real options – timing, sizing, flexibility, and fundamental – and learn how they can enhance NPV estimates. Get a grip on evaluating projects with real options, and put it all together with practical examples.

► Ready to get real with options? Try our real options evaluation simulator here.