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Capital Asset Investment: Strategy, Tactics and Tools


Capital Asset Investment offers a detailed exposition of the theory, quantitative methods, and applications of capital budgeting. Comprehensive in scope, the author covers all the major topics in the field, providing a balanced treatment of the various approaches to capital project evaluation, exploring their strengths and weaknesses.

Capital budgeting decisions involve the largest tangible investments for any firm – long-term commitments that are generally irreversible in the short run. Such decisions directly impact on shareholder value and the future viability of the firm. In this book, the author offers a harmonious blend of the 'old' techniques, such as the MAPI method of capital investment appraisal, with the newer, such as the Capital Asset Pricing Model (CAPM) and the most recent innovation, the use of real options.

Capital Asset Investment: Strategy, Tactics and Tools is essential reading for financial managers, industrial and manufacturing engineering managers and all those involved in forward planning and business strategy formulation and execution. The book will also be of use to students of finance.

Anthony F. Herbst is Professor of Finance and holds the Charles R. and Dorothy S. Carter Chair at the University of Texas, El Paso. Prior to earning a Ph.D. in Economics at Purdue University, he was manager of operations research for the National Bank of Detroit, and previously had held positions as an industrial engineer for Koppers Corporation and Ford Motor Company.
From 1982 through 1998 he served as founding editor of the Journal of Financial Engineering (now merged with the Journal of Derivatives), where he is now an associate editor. He is also a member of the editorial boards for the Journal of Financial Research and The Global Finance Journal, and advisor on the editorial board of the Journal of Taxation of Financial Institutions. He is the author of several books including Analyzing and Forecasting Futures Prices (John Wiley & Sons Ltd.)


Introduction: The big picture, environment, terminology, and preview.

The objective of capital budgeting.

Estimating basic project characteristics.

Cost of capital.

Traditional methods that ignore time-value of money.

Traditional methods that recognize time-value of money: the net present value.

Traditional methods that recognize time-value of money: the internal rate of return.

Reinvestment rate assumptions for NPV and IRR and conflicting rankings.

The MAPI method.

The problem of mixed cash flows: I.

The problem of mixed cash flows: II.

Appendix: The problem of mixed cash flows III—a two-stage method of analysis.



Leveraged leases.

Alternative investment measures.

Project abandonment analysis.

Multiple project capital budgeting.

Appendix to multiple project capital budgeting.

Utility and risk aversion.

Single project analysis under risk.

Multiple project selection under risk: computer simulation and other approaches.

Multiple project selection under risk: portfolio approaches.

The capital asset pricing model.

Multiple project selection under risk.

Real options.

Appendix: Financial mathematics tables and formulas.