Welcome to this course on capital budgeting. capital budgeting is a strategic process aimed at identifying new investment opportunities that maximize shareholder value. capital budgeting relies heavily on financial theory. But it's common practice to see capital budgeting misapplied, or in some cases not applied at all to major investment decisions, particularly in small sized organizations. Now, I'm thrilled that you're able to join me here today. My name is Blair cook, and I'm a professional accountant.

But I've spent most of my career working in the finance side of the business, including a number of years working in the corporate development group for a couple of large utility companies. capital budgeting was a big part of the strategic planning of these companies. Let me begin by telling you a little story as we get started. Now, I come From the tiny province of Nova Scotia on the east coast of Canada, until just recently, this was a province that relied heavily on fuel oil and coal to meet much of its energy needs. In the late 1990s, Exxon Mobil developed a large offshore natural gas project that promised to bring natural gas to the North Eastern Market. The province held a competitive process to award franchise rights to one company to become the natural gas distribution company for the province.

The franchise rights were won by a large us utility with operations spanning both North and South America, who promised to spend more than a billion dollars over seven years to install the natural gas distribution infrastructure. This was a really big deal for our province, and I was lucky enough to be hired to develop the financial plan for the franchise. However, as I began model The rollout strategy, and as we started getting a better, more detailed understanding of the risks and challenges, the economic started going sideways and in a hurry, it turns out that the team that have won that rights has severely underestimated how much natural gas at several hundred thousand households and a few sporadic cyclical industries would consume. They had also underestimated how expensive it would be to bury pipes in the ground of a province largely composed of bedrock. After a year or so of trying, I recall flying down to the head office and meeting with the executives of the holding company.

What stood out for me was how they were evaluating their capital allocation decisions. They had a list of a couple of dozen large projects in the hundreds of millions and billions of dollars, and each one ranked using various indicators of net present value and payback and profitability index. At the bottom of the list, stood Nova Scotia and try as we might we couldn't get the concessions from the provincial government that would help boost the returns for the project. The US executive team pulled the plug on the billion dollar project and surrendered the franchise, walking away from 10s of millions of dollars of investment after only two years of operations. Now, I learned a few valuable lessons from this experience. First of all, sometimes walking away is indeed the right decision.

This utility stock price has quadrupled in the 14 years since not a bad track record in capital allocation if you ask me. But secondly, I think they did make a capital budgeting mistake that might have avoided the write off of their investment and the embarrassment of walking away from such a public commitment. The mistake was that the business plan they presented that got them the franchise Did not adequately consider the risks of the project. And as a result, they had a very low probability of success from the outset. The problem with making the wrong capital budgeting decision is that you don't immediately feel the effect. It can take years to ultimately determine that you've made a mistake.

And by that time, you've already spent considerable time and capital on pursuing the project, at which point it might be too late to get back any of the resources that have been expended. So developing a robust understanding of risk and return is important at the outset before the decision to pursue has been made. In this course, we're going to cover the important elements of capital budgeting, and how you can apply theory to improve the strategic allocation of capital at your organization. The topics I'm going to cover during this course will walk you through the capital budget. process, I will take the opportunity to highlight some of the tips, traps and areas of common confusion. We will also discuss perhaps a new approach for how you conduct due diligence and generate robust assumptions that explore key uncertainties.

Next, we will talk about the mechanics of preparing a capital budget, including how you determine the right discount rate. Consider taxes and contemplate a terminal value. If and when appropriate, then we need to consider how we will communicate decision relevant information in a way that not only enlightens, but enhances the selection of a viable capital project to pursue. And finally, we'll apply Excel and take a quick detour to compare capital budgeting to lease versus buy dilemmas are related but often confused aspect of capital budgeting. I hope you'll join me click on the first lesson to begin