Managerial Economics Problem-Solving in a Digital World

This topic relates to capital budgeting. The starting point is an explanation of why investment analysis is important in managerial economics, and the different types of investment and investment decision. Cash flow analysis and the principles involved in identifying and measuring relevant cash flows is discussed. The concept of risk and types of risk, stand-alone risk, within-firm risk and market risk, are discussed. The security market line (SML), beta coefficients and the capital asset pricing model (CAPM) are explained. The cost of capital is examined, explaining the calculation of the cost of debt, the cost of equity and the weighted average cost of capital (WACC). Methods of evaluation of individual projects are discussed, with a focus on net present value (NPV) and internal rate of return (IRR). There is a discussion of the determination of the optimal capital budget for a firm, in terms of the investment opportunity schedule (IOS) and the marginal cost of capital (MCC), with the distinction between mutually exclusive projects and independent projects. Case studies include two resource-heavy situations: the HS2 rail link and 5G telecommunications.