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This reading introduces the capital allocation process. It presents the valuation tools and financial metrics used by companies to evaluate investment opportunities. The reading begins with the relatively simple problem of evaluating a single investment proposal using net present value (NPV) and relates NPV to the concept of value maximization. It then considers alternative metrics and examines the pros and cons of each. Each metric is compared to NPV in execution and likely performance. The reading then proceeds to a more complicated problem commonly faced by managers: how to choose among multiple projects, often in the presence of budgetary or managerial constraints. Students are given a framework for comparing and ranking projects utilizing the various metrics. A brief detour links NPV to the capital markets and, specifically, to risk and expected returns. The reading concludes with an overview of real-world complications that can limit the reliability of the various financial metrics used throughout the reading, and considers ways to adapt metrics and methodologies accordingly. The reading contains seven web-based interactive illustrations. Five of these provide an application and visual representation of important tools and metrics covered in the reading, including NPV, internal rate of return, payback period, and the profitability index. Two additional interactives illustrate the complexity of making capital budgeting decisions in a complex operating environment with multiple investment opportunities. The first of these examines the implications of using a single hurdle rate to evaluate projects of varying degrees of riskiness; the latter illustrates the difficulties involved in selecting the value maximizing set of opportunities in the presence of a budget constraint and/or in situations where one or more projects monopolize the available budget.

This case discusses the possible reasons for the moribund investment-linked insurance market in Singapore, as well as the concerns of three major stakeholders - financial advisor, insurance consumer and life insurer company. It also considers the perspective of the regulator of the insurance sector.

In February 2015, Daniel Loeb (a US-based activist investor) announced his firm had a large investment in FANUC Corporation, a leading producer of industrial robots and software for machine tools. Loeb was demanding that the Japanese firm change its financial and governance policies (e.g., distribute more cash, fix its "illogical" capital structure, and provide more information to shareholders). FANUC's CEO, Yoshiharu Inaba, and his board must decide if and how to respond. One the one hand, the firm had been very successful having built leading global market shares in each of its core divisions and profitability that exceeded what Goldman Sachs earned on a per person basis. On the other hand, the Japanese government was calling for financial and governance reform as part of the prime minister's recently-announced economic growth strategy known as "Abenomics". Although Inaba and his team had previously considered many of the proposed changes, the question was whether it was now time to actually make some of the changes.

Jamestown is contemplating how to best lease a portion of their new development along the Brooklyn waterfront, Industry City. The 6 million square foot, mixed-use development is meant to accommodate Brooklyn's growing innovation, creative, and "maker" communities. Jamestown is intrigued by the recently revived trend of "shared office space," championed by WeWork and originated by well-known players like Regus. The case is intended to introduce the reader to the shared office market, including the similarities and differences from traditional office space, and explore the underlying trends driving this change, as well as the risks to the business model. Jamestown must weigh the pros and cons of their different leasing strategies, including economic, operational, and reputational, and must decide whether or not to lease the space to a traditional tenant, lease the space to a third-party shared office operator (e.g., WeWork or Regus), or develop their own shared office offering.

Spreadsheet supplement to case 216042. In February 2015, Daniel Loeb (a US-based activist investor) announced his firm had a large investment in FANUC Corporation, a leading producer of industrial robots and software for machine tools. Loeb was demanding that the Japanese firm change its financial and governance policies (e.g., distribute more cash, fix its "illogical" capital structure, and provide more information to shareholders). FANUC's CEO, Yoshiharu Inaba, and his board must decide if and how to respond. One the one hand, the firm had been very successful having built leading global market shares in each of its core divisions and profitability that exceeded what Goldman Sachs earned on a per person basis. On the other hand, the Japanese government was calling for financial and governance reform as part of the prime minister's recently-announced economic growth strategy known as "Abenomics". Although Inaba and his team had previously considered many of the proposed changes, the question was whether it was now time to actually make some of the changes.

In January 2007, Metro do Porto, a light rail network, entered into an interest rate swap agreement with Banco Santander Totta on a notional principal of €89 million. The intent was to reduce the interest costs that Metro do Porto was incurring. This was a complex swap agreement that brought immediate benefits to Metro do Porto but proved catastrophic in the long run. Two years after the swap commenced, a “snowball clause” in the swap agreement took effect, increasing Metro do Porto’s liability beyond 60 per cent per annum at a time when market interest rates were low and expected to drop even lower. It was unclear whether the company entered into this agreement out of ignorance, political pressure, or both, but the end result was a lawsuit. Students are expected to analyze the terms of this swap and decide whether the swap constituted good practice from a risk management perspective and whether Metro do Porto should have been able to anticipate the possible losses.

In April 2013, Procter & Gamble (P&G), the world's largest consumer packaged goods (CPG) company, announced that it would extend its payment terms to suppliers by 30 days. At the same time, P&G announced a new supply chain financing (SCF) program giving suppliers the ability to receive discounted payments for their P&G receivables. Fibria Celulose, a Brazilian supplier of kraft pulp, joined the program in 2013, but is re-evaluating the costs and benefits of participating in the SCF program in the summer of 2015. The firm's treasury group must decide whether to keep using the program and, if so, whether to keep their existing SCF banking relationship or start a new relationship with another global SCF bank.

This reading covers the basic elements of bonds and introduces some of the analytical techniques used to understand and compare them. It assumes the reader is familiar with the concept of the time value of money (see HBP 8299). The reading provides an economic analysis of simple risk-free bonds, including both zero-coupon and coupon bonds, and extends to bonds with credit risk. The material covers the relationships between prices, yields and maturity and introduces the concept of duration. The reader is introduced to the yield curve and the term structure of interest rates. Selected advanced topics (floating rate bonds, forward rates, evaluating default risk) are included in the Supplemental Reading. The reading concludes with a brief discussion of how the formulas in the reading relate to pre-programmed Excel functions. The reading includes nine interactive illustrations: "Bond Terminology" is a term sheet excerpted from an Apple, Inc. prospectus which familiarizes the reader with bond terminology. "Calculating the Price of a Coupon Bond" calculates the price (present value) of a bond's cash flows, based on reader inputs for maturity, coupon and yield to maturity (YTM). "Inverse Relationship Between Bond Price and Yield to Maturity" demonstrates the inverse relationship between prices and yields. "Historical Yield Curves" is an animated display of the U.S. Treasury yield curve from 1962 to 2015. "Bond Duration" calculates the duration of a bond based upon inputs for maturity, coupon and YTM. "Bond Duration and Maturity" demonstrates the relationship between duration and maturity over a 50-year horizon. "Calculating Bond Duration" is an animated demonstration of how duration is calculated. "Bond Price Sensitivity to Changes in Interest Rate" demonstrates the sensitivity of bond duration to changes in interest rates and maturity.

In April 2013, Procter & Gamble (P&G), the world's largest consumer packaged goods (CPG) company, announced that it would extend its payment terms to suppliers by 30 days. At the same time, P&G announced a new supply chain financing (SCF) program giving suppliers the ability to receive discounted payments for their P&G receivables. Fibria Celulose, a Brazilian supplier of kraft pulp, joined the program in 2013, but was re-evaluating the costs and benefits of participating in the SCF program in the summer of 2015. The firm's treasury group and its US country manager must decide whether to keep using the program and, if so, whether to keep their existing SCF banking relationship or start a new relationship with another global SCF bank.

Due to an increase in the number of wealthy individuals the demand for artwork had increased, and artwork was considered an investment asset. Artwork was listed as a "treasure asset" or an "investment of passion" by investment industry publications, recognizing its importance in the portfolios of the wealthy. The financialization of the art market went hand in hand with a growing understanding of the investment properties of art. Developing this knowledge took time because measuring the returns to a heterogeneous and illiquid asset like art-or real estate-was challenging.

In 2004, bids were invited from airport developers and operators for the development and operation of Mumbai's Chattrapati Shivaji International Airport and Delhi's Indira Gandhi International Airport. On January 31, 2006, a consortium led by GMR Group (GMR) was selected as the only technically qualified bidder. However, in order to avoid a monopoly in Indian airport operations, GMR was asked to choose between the two airports and match the financial bid of another bidder that was not technically qualified for the work. The Delhi airport, the pride of the National Capital Region, would serve as a gateway for participants, dignitaries, and other guests arriving for the upcoming Commonwealth Games to be held in New Delhi in October 2010. However, the Mumbai airport was the gateway to business investments in India. GMR faced a difficult choice between a mission-critical airport in the National Capital Region or an airport in India's commercial capital. Which airport would give GMR an edge in the global aviation sector? Which choice was in line with GMR's vision?

Student spreadsheet for case W16306.

In early 2013, an analyst at an insurance company was examining whether IndusInd Bank, a mid-size bank in India, would be a good investment for the insurance fund's equity portfolio. From January 2008 until March 30, 2013, the bank's stock had tripled under its new management. The analyst wondered whether deploying funds in the bank would yield any significant returns. He decided to use the available financial information and the residual income valuation method to forecast the company's stock price.

Student spreadsheet for case W16287.

In the summer of 2015, India-based Amtek Auto Ltd., one of the country's largest companies in the manufacturing of automotive components, was on the brink of financial ruin. After more than a decade of being immersed in a spending spree on acquisitions to build capacity and expand its clientèle in both the European and Asian auto markets, Amtek's stock plummeted by 50 per cent within two days as nervous investors worried about the company's ability to make its scheduled debt payments. Tensions were high as the company faced mounting pressure over its liquidity issues, and after reporting a net loss for the first time in two decades. With rumours of bankruptcy on the horizon, what steps could the company take to decrease its debt burden at a time when the automotive industry was in a slump? Should Amtek consider selling off some of its assets to raise the needed cash, or should it look to banks and investors?

In the summer of 2015, India-based Amtek Auto Ltd., one of the country’s largest companies in the manufacturing of automotive components, was on the brink of financial ruin. After more than a decade of being immersed in a spending spree on acquisitions to build capacity and expand its clientèle in both the European and Asian auto markets, Amtek’s stock plummeted by 50 per cent within two days as nervous investors worried about the company’s ability to make its scheduled debt payments. Tensions were high as the company faced mounting pressure over its liquidity issues, and after reporting a net loss for the first time in two decades. With rumours of bankruptcy on the horizon, what steps could the company take to decrease its debt burden at a time when the automotive industry was in a slump? Should Amtek consider selling off some of its assets to raise the needed cash, or should it look to banks and investors?

In early 2013, an analyst at an insurance company was examining whether IndusInd Bank, a mid-size bank in India, would be a good investment for the insurance fund’s equity portfolio. From January 2008 until March 30, 2013, the bank’s stock had tripled under its new management. The analyst wondered whether deploying funds in the bank would yield any significant returns. He decided to use the available financial information and the residual income valuation method to forecast the company’s stock price.

In December 2015, Canadian Pacific Railroad (CPR) has just made its third bid to acquire Norfolk Southern Corporation (NSC), one of the largest railroads in the United States. Having rejected the prior offers, NSC's CEO James Squires and the NSC board must now value the current offer including the projected merger synergies as well as a recently-added contingent value right (CVR) designed to "sweeten" the offer, and decide how to respond.