Net Present Value and Capital Budgeting
Course Module in Introductory Finance
Course Modules help instructors select and sequence material for use as a part of a course. Each module
represents the thinking of subject matter experts about the best materials to assign and how to organize
them to facilitate learning.
Each module recommends four to six items. Whenever possible at least one alternative item for each
main recommendation is included, as well as suggested supplemental readings that may provide a
broader conceptual context. Cases form the core of many modules but we also include readings from
Harvard Business Review, HBS background notes, and other course materials.
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Rationale for selection and sequencing the items in this module
Both of the suggestions in Section 1 provide an intuitive overview of the basic concepts and terminology
of project valuation. Each selection covers the time value of money, discounted cash flows, net present
value, and internal rates of return. The Buying Time tutorial is an interactive multimedia presentation that
provides examples from both personal and corporate finance. It equals one to two hours of homework.
The alternative, a traditional paper note, Introduction to Accumulated Value, Present Value, and Internal
Rate of Return, first presents the concepts and then derives the net present value formula and calculation
Section 2 gives students the opportunity to practice the theory and mechanics presented in the first
section in simplified contexts. Valuing Capital Investment Projects presents four problems that can be
completed in a single class, arranged according to ascending difficulty, to show students how to apply
discounted cash flow methods to capital budgeting. The alternative, Tree Values, focuses on a logging
company’s decision on the optimal time to cut trees. Students must rank three mutually-exclusive forest
management strategies to maximize value.
The contexts get more complicated in Section 3. Stryker Corporation: In-Sourcing PCBs examines a
proposed investment in the capability to manufacture printed circuit boards (PCBs) in-house rather than
buying them from third-party contract manufacturers. Students must estimate incremental cash flows,
terminal value, and discounting, and compare NPV, IRR, and payback periods as investment criteria
within the context of a business case that targets risk reduction, not increasing profits or cash flow. The
alternative, the HBP Brief Case New Heritage Doll, requires students to evaluate two projects and decide
which to recommend to the company’s capital committee. Students must estimate the incremental debtfree cash flows for each of the projects, determine terminal values, assign discount...