PRINCIPLES OF CAPITAL BUDGETING

I. INVESTMENT APPRAISAL PROCESS A. TECHNICAL ANALYSIS B. FINANCIAL ANALYSIS C. ECONOMIC ANALYSIS II. CAPITAL BUDGETING TECHNIQUES A. NONDISCOUNTING METHODS A.1 PAYBACK PERIOD METHOD A.2 AVERAGE RATE OF RETURN METHOD B. DISCOUNTING METHODS B.1 NET PRESENT VALUE( NPV) METHOD B.2 INTERNAL RATE OF RETURN (IRR) METHOD B.3 PROFITABILITY INDEX B.4. COMPARISON OF NPV AND IRR METHODS III. SPECIAL ISSUES IN CAPITAL BUDGETING A. CONFLICTING RANKINGS A.1 REASONS FOR CONFLICTING RANKINGS A.2 ADJUSTMENTS OF IRR METHOD A.2.1 INCREMENTAL IRR A..2.2 MODIFIED IRR ( MIRR) B. UNEQUAL LIVES B.1.REPLACEMENT CHAIN METHOD B.2 EQUIVALENT ANNUAL ANNUITY APPROACH C. CAPITAL RATIONING IV.ALTERNATIVE NPVs A. TRADITIONAL (WACC) APPROACH TO NPV B. EQUITY RESIDUAL METHOD C. ADJUSTED PRESENT VALUE METHOD CASE: EVA AND CAPITAL BUDGETING DECISIONS

I. INVESTMENT APPRAISAL PROCESS

A.TECHNICAL EVALUATION
Technical appraisal of investment projects involves the analysis and decision making regarding the following issues: 1. Determination of the technical specifications and quality standards of output. 2. The choice of optimum production capacity 3. Breakdown of the investment by years 4. Determination of the total cost of the fixed investment 5. Location selection 6. Determining the need for technical assistance, patent, know-how and their cost 7. Selection of the technical specifications of the machinery and equipment. 8. Controlling the adequacy of the available infra-structure 9. Evaluation of the availability of raw materials and the flexibility regarding the number and choice of suppliers

B. FINANCIAL EVALUATION In the financial appraisal of investment projects , cash flows expected over the life of the project are estimated and the riskiness of cash flows is determined . The discount rate appropriate for the projects risk level is used to discount the cash flows and estimate the profitability of the investment alternatives. Financial evaluation involves: 1.Estimation of working capital and initial investment needs 2.Breakdown of the investment by years 3. Estimation of production costs, operating costs,and other operating cash outflows 4. Estimation of operating cash inflows 5.Determining the financing need and sources 6.Estimating the appropriate discount rate 7.Formation of projected income statements over the life of the project 8.Evaluating the profitability of the investment proposals.

C. ECONOMIC EVALUATION
Economic evaluation of the projects involves the following steps: 1. Evaluation of the consistency of the investment with the development policy. ( five-year targets, objectives of development, annual targets) 2.Effects on national income: 2.1. Determining the value added of the investment 2.2 Determining Capital/ Output ratio 2.3. Effects on Capital /Employment ratio 2.4. Social profitability estimation 3. Effects on the Balance of Payments: 3.1. Foreign exchange earnings of the project 3.2. Marginal productivity of foreign exchange 3.3. Foreign exchange output- capital relations

II. CAPITAL BUDGETING TECHNIQUES

Capital Budgeting involves a current investment in which the benefits are expected to be received beyond one year.Thus, any asset with a life of more than one year involves capital budgeting. Capital budgeting involves generation of investment proposals; the valuation of cash flows for the proposals,; evaluation of cash flows, selection of projects based on an acceptance criterion; and the continuous reevaluation of projects after their acceptance.Investment projects can be grouped into five categories: 1. Projects related to new products and expansion of existing products 2. Projects related to replacement of equipment and buildings 3.Research and Development projects 4.Exploration investments 5.Others ( e.g. Acquisition of a polution control device, or expenditures to comply with health standards)

Investment analysis is the process of measuring these expected benefits and relating them to initial outlay needed to acquire them in such a way so as to permit objective comparison with alternative opportunities. Basic inputs to financial analysis: 1.Cash flow Schedule a.The amount of initial outlay to acquire project b.The amount of cash that will be released when the investment is liquidated at the end of its economic life.(Terminal value) c.The stream of cash flows that will generate over the life of the investment 2.The times at which the cash inflows and outflows are expected to occur 3.The expected productive life of the investment 4.The rate of return ( hurdle rate which reflects the projects riskiness) at which this investment be evaluated. MUTUAL EXCLUSION AND DEPENDENCY A proposal is said to be mutually exclusive if its acceptance precludes the acceptance of one or more proposals. A contingent or dependent proposal is the one whose acceptance depends upon the acceptance of one or more other proposals.

A. NONDISCOUNTING METHODS
A.1. PAYBACK PERIOD METHOD
Payback period is the time projects have to run before their original investment is returned. The decision rule is to accept any project having equal or shorter payback than the target period. EXAMPLE 1: A. OUTLAYS W -1000 X -1000 Y -1000 Z -1000

B.RECEIPTS Years 1 2 3 4 Payback period

NPV ( 10% )

500 500 300 100 2 years $ 161 .44

250 250 250 250 4 years -207.52

100 300 400 600 3 1/ 3 49.15

500 500 ----2 years -132.25

Target payback= 2 years Select W,Z if independent Target payback = 4 years Select all , if independent

Advantages: 1. Payback method makes use of incremental cash flows.It is a popular method because : - It has applications to industries subject to rapid changes - When used with a low payback ( high standard) ,it is referred to as a dynamic policy where the firm restricts itself to high standards. 2. Payback period helps to assess the risks of a time nature. However, even if two projects have the same payback, they may have different cash flows and payback does not consider the flow of benefits within the payback. Shortcomings of the method: 1.Payback method ignores profitability.A project can have a high payback but low discounted yield.(e.g. project Z in example 1) 2.Payback method ignores the time value of money. 3.Payback method does not consider cash flows beyond the payback period.

Discounted payback: Second shortcoming can be eliminated by the use of discounted payback. EXAMPLE 2: Project A Year 0 -20,000 1-6 $ 6,500 Payback period = 20,000/ 6500 = 3.07 years PV= 6500 ( PVIF 10%,1) + 6500 (PVIFA 10%,2)+..+ 6500 (PVIF10%,6) = 5909 + 5372+ 4883+ 4440+ 4036+ 3669

Discounted payback= 3 3836/4440 = 3.86 years

In projects with constant cash flows and constant lives, there is a relationship between payback period and profitability.Payback reciprocal is the indicator of profitability. PV = A( PVIFA i,n) = A ( 1- (1+i) -n / i) = A/ i A/ i x 1/ (1+i)n i PV = A A x 1/ (1+i)n if n or i is large, second term gets smaller and profit will be approximated by payback reciprocal. i = A / PV

EXAMPLE 3: Year 0 1-10 years Cash Flows $22,000 5,000

Payback reciprocal = 5000/ 22000= 22.73% 22000 = (PVIFA i,10)

PVIFA i,10 = 4.4 i= 19%

Payback reciprocal overestimates profitability. The use of payback may be such that payback period may represent a horizon of confident judgement for businessmen.

A.2. AVERAGE ( ACCOUNTING ) RATE OF RETURN

The average rate of return is an accounting method and represents the ratio of the average annual profits after taxes to the initial nvestment. Average rate of return (ARR) = Average Net Profit / Initial investment EXAMPLE 4:
Project A Net Profit Cash Flows 1 $3000 2 2000 3 1000 6000 5000 4000 Project B Net Profit Cash Flows 2000 2000 2000 5000 5000 5000 Project C Net Profit Cash Flows 1000 2000 3000 4000 5000 6000

Each project has an initial investment of $ 9000 and a life of three years. ARRA = ARRB = ARRC = 2000/ 9000 = 22.2%

The firm determines a minimum required rate of return on the investments that will be selected. If the profitability of the project exceeds this rate, it is acceptable.

Advantages:
The method is simple to use.It rests on accounting data, rather than cash flows , which is easier to obtain. Disadvantages: It disregards the pattern of cash flows and their timing. Most firms prefer project A since it provides a larger portion of cash benefits in the first year.Although ARR method treats these projects equally acceptable, the different pattern of cash flows may be influential in preference of one relative to others.

B.DISCOUNTING METHODS
The discounted cash flow methods explicitly weigh the time value of money and focus on cash inflows and outflows rather than net income as computed in the accrual accounting sense.Assumptions of the discounted cash flows: a.Required rate of return on the project is constant b.Cash flows are certain c.Cash flows are independent d.Initial amount that can be borrowed or loaned at the specified discount rate.
B.1. NET PRESENT VALUE METHOD With net present value method , all cash flows are discounted to present, using the required rate of return. n NPV= At / (1+k)t t=1 If NPV is equal to or greater than zero, the proposal is acceptable.If not, it is rejected. When NPV is positive, the firm is taking on a project with a return greater than that necessary to leave the market price of the stock unchanged. EXAMPLE 5: An investment with an initial outlay of $ 18,000 and cash flows of $ 5600 for five years and the required rate of return of 10% has a NPV of $ 3228. NPV= 5600 ( PVIFA 10%, 5) 18,000 = $ 3228 Since NPV>0, the project is acceptable.The value of the firm will rise by $3228 if it undertakes the project.

B.2.INTERNAL RATE OF RETURN (IRR) METHOD

Internal rate of return is the discount rate that equates the present value of the expected cash outflows with the present value of the expected cash inflows. n At / (1+r)t =0 t=0 where At is the cash flow for period t whether it be a net cash outflow or inflow and n is the last period in which a cash flow is expected.If cash flows are even, then initial outlay is divided by cash flows and the corresponding interest rate is found. EXAMPLE 6: In Example 5, the initial investment may be divided by the annual cash flows: PVIFA i, 5 = 18000/ 5600 = 3.214 i (IRR) = 16% > k= 10% so the project can be accepted. n In/ (1+r) = Dn / (1+r)n (1) n =0 n=0 Left hand side of equation (1) represents the discounted value of the investment outlays for the project made at any time from the beginning of year one until infinity. Similarly, the right hand side stands for the discounted value of the projects net inflows over the same period.The rate of return that equates both sides is the internal rate of return. IRR is compared with the required rate of return (k) and the project will be accepted if IRR is equal to or greater than k . Accepting a project with IRR> k should result in an increase in the market price of the stock.

B.3.

PROFITABILITY INDEX( Benefit-Cost Ratio)

Profitability index of a project is the present value of future net cash flows over the initial outlay. n PI = At / (1+k)t/ A0 t=1
As long as profitability index (PI) is equal to greater than one, the investment is acceptable.

B.4. COMPARISON OF THE METHODS

NPV method only produces optimal solutions under conditions of certainty and perfect knowledge. The valuation based on NPV assumes that all net cash flows from a project are paid out as dividends and that cash flows are known with certainty.By accepting all projects which have a positive NPV, we ensure that V0 is maximized since we assume the value of the firm is the total present value of cash dividends from its projects. Thus ignoring uncertainty, value of the firm depends on the size of its dividend stream and discount rate. Under uncertainty, the use of NPV may not be optimal. So, NPV models should be adjusted for uncertainty . NPV and IRR have different reinvestment assumptions. These methods have different assumptions with respect to the marginal reinvestment rate on funds released from the projects.The IRR implies that the funds are reinvested at the internal rate of return over the remaining life of the proposal. NPV assumes a reinvestment rate equal to the required rate of return. NPV always provides correct rankings of mutually exclusive projects whereas IRR sometimes does not.IRR asumes a high reinvestment rate for projects with high IRR and vice versa.With the NPV method, the reinvestment rate is the same for each proposal.

II. SPECIAL ISSUES IN CAPITAL BUDGETING

A. CONFLICTING RANKINGS

A.1.Reasons For Conflicting Solutions When choosing one of several mutually exclusive projects, one might obtain conflicting results. Conflicting rankings can ocur between NPV versus IRR and PI. The methods give contradictory rankings when: 1.The initial outlays are different. 2.The pattern of cash flows are different 3.The lives of the projects are different. EXAMPLE 7: Year 0 1 2 3 4 NPV (10%) IRR Project A -23,616 10,000 10,000 10,000 10,000 $ 8083 25% Project B -23,616 0 5,000 10,000 32,675 $ 10,346 22%

EXAMPLE 8: Year 0 1-5 NPV (14%) IRR MIRR Machine A $-5,000 $ 1672 $ 740 20% 17.2% Machine B -10,000 3200 986 18% 16.2%

In the above two examples, the NPV and IRR methods give conflicting results. In this case ,usually the project that has the highest NPV is selected. NPV always provides correct rankings whereas IRR sometimes does not.There are several reasons: 1.Because the IRR method is expressed as a percentage, the scale of investment is ignored. IRR favors small projects whereas NPV method takes scale into consideration and has a bias in favor of large projects affording a greater NPV. 2. Multiple IRR or no IRR: If there are cash outflows in more than one period and these are separated by one or more periods of net cash inflows, there may be more than one IRR that equates outflows to the present value of inflows. EXAMPLE 9: Year Cash Flows 0 -80,907 1 180,000 2 -100,000 IRR1= 7 % IRR2 = 15 % Accept the investment if the required rate of return is between 7 % and 15%. NPV is positive between these rates and negative at all other rates. Since 7 1/2% <k( 10%) < 15%, NPV is positive between these values and project is acceptable.

EXAMPLE 10: Year 0 1 2

Cash Flows +1.0 -2.0 +1.5

This cash flow stream has no IRR. 3. Changing discount rates NPV method can easily be used when the required rate of return changes over the life of the investment. However, it is difficult to determine which k to use to compare with IRR. Usually, an average k is calculated and compared with IRR. 4.NPV has additive property. NPV(A+B)= NPVA + NPVB This property enables the firm to select projects in a way to maximize total NPV. A.2. Adjustments of the IRR method A.2.1.Incremental internal rate of return Projects A and B in example 8, can be evaluated using incremental IRR approach. a.Compute the difference in cash flows between the larger and the smaller projects. b.Compute the IRR on the difference. c.If the firm earns more than the IRR on the difference , it should choose the smaller mutually exclusive project and choose the larger project if the firm earns less.

EXAMPLE 11: Year 0 1-5

Investment B Investment A -5000 1528

NPV( 14%) = $ 246 IRR= 16% >k. Investment B is regarded as two investments- one offering 20% (A)and the other offering 16%. If the firm can earn more than $ 1528 on the difference on a new project C ,the firm would prefer A and the new investment C. EXAMPLE 12: Year 0 1-5

Project C -5,000 $ 1,562

IRR = 17% NPV ( 14%) = $ 362 Investment A B C NPV (k=14%) 740 986 362

Since Project C provides higher cash flows than the incremental project, projects A+C should be selected.In this case NPV would be maximized. NPV A+C= 740+ 362 = 1102 NPVA+C> NPV B,

A.2.2. Modified IRR (MIRR) When the IRR criterion is used with a project that has non conventional cash flows , multiple rates of return arises. Modified internal rate of return can be used to eliminate some of the problems. MIRR assumes that cash flows from all projects are reinvested at some explicit rate, generally the cost of capital, while the regular IRR assumes that the cash flows are reinvested at the projects IRR. MIRR solves the multiple IRR problem. EXAMPLE 13: Year 0 1 2 3 4 NPV (10%) IRR MIRR

Project S -1000 500 400 300 100

$ 78.80 14.5% 12.1% a $

Project L -1000 100 300 400 600

49.15 11.8% 11.3%b

a.TVs= 500(FVIF 10%,3)+ 400(FVIF 10%,2)+ 300( FVIF 10%,1)+ 100 =1579.5 1000= 1579.5( PVIFi,4) i= 12.1% b.TVL = 1536 1000= 1536( PVIF i,4) PVIFi,4= 0.65104 i=11.3%

MIRR is superior to regular IRR as an indicator of the projects true rate of return but NPV is still better in choosing among competing projects that differ in size. *If two projects are of equal size but differ in lives, the MIRR will always lead to the same accept /reject signal as NPV **If projects differ in size, then conflicts still occur.The NPV of the larger project is greater but MIRR of the smaller project is higher as can be seen in Example 8. So, IRR and MIRR conflict with NPV when scales of the mutually exclusive projects differ.

B. UNEQUAL LIVES
When two mutually exclusive projects have unequal lives, the comparison of the two can not be realized.There are two approaches for resolving the problem:
B.1 Replacement Chain Approach It is common to compute the cash flows assuming one or more replacements until a common horizon is reached. EXAMPLE 14: Year 0 1-5 NPV (k= 12%) Model A -38,750 20,000 $33,346 Year 0 1-10 Model B -85,000 23,000 $44,955

It is assumed that model A is replaced with a similar machine 5 years from today at an estimated cost of $ 45,000 and will continue to produce cash flows of 20,000 each year. Year 0 1-4 5 6-10 Cash Flows -38,750 20,000 -25,000 ( 20,000-45,000) 20,000 $48,720

NPV (k=12%)

Over a ten year period NPV of Model A ( $48,720) is higher than that promised by Model B ($ 44,955) over the same period.

B.2. Equivalent Annual Annuity Approach ( EAA)

Another method used to deal with unequal lives is NPV normalization or EAA method. Cash flows are assumed to be the same each time the model is replaced.This assumption allows the computation of NPV for an infinite horizon. EXAMPLE 15: Year 0 1 2 3 4

A -15,000 -5,000 -6,000 -8,000 ------

B -15,000 -5,500 - 6,500 -9,000 -11,000

NPV(k=10%) $ -30,514 $- 39,647 Project A : A (PVIFA 10%,3)= -30,514 A= -30,514/ 2.4869 A= $-12,270 NPV= -12,270/ .10= $-122,700 Firm will be indifferent betwen the above cash flows and $ -12,270 forever. Project B: A (PVIFA 10%,4) = -39,647 A= -39,647/ 3.1699 = $ -12,507 NPV= 12507/ .10 = $-125,070

This is equivalent to a firm spending $ 12,507 forever.The annuities for Project A is lower.Since these are outflows, we select the Project with lower outflows; Project A.

EXAMPLE 16 : Project A B C Life 5 10 15 Annual cash flows 1000 1000 1000 Initial outlay 2864 4192 5092 IRR NPV (10%) 22% $927 20% 1953 18% 2514

Project A: A(PVIFA 10%,5) = 927 A= 927/ 3.7908 A= $ 245 NPV = $ 245/ 0.10 = $ 2450

Project B: A (PVIFA 10%,10) =1953 A = 1953/ 6.1446 A= 318 NPV= 318/0.10= $ 3180 Project C : A (PVIFA 10%,15) = 2514 A= 2514 /7.6061 A=$ 331 NPV= 331/ 0.10= $ 3310 Normalized NPVs reveal that Project C has the highest annuity and NPV of all. NPVC> NPVB>NPVA

C . CAPITAL RATIONING
Capital rationing occurs any time there is a budget ceiling ,or constraints on the amount of funds that can be invested during a specific period. EXAMPLE 17: Project 4 7 2 3 6 5 1 Profitability Index 1.25 1.19 1.16 1.14 1.09 1.05 0.97 Initial investment $ 400,000 100,000 175,000 125,000 200,000 100,000 150,000

If budget ceiling is $ 1 million during the present period and the proposals are independent of each other, we select proposals in descending order of profitability until the budget is exhausted. In the above example proposal 5 is rejected even though its profitability index is above one since the budget is exhausted. *If the firm rations capital and rejects projects that yield more than the required rate of return, then investment policy is less than optimal. *In this analysis , it is assumed that capital is rationed for one period and all the projects are independent.When these conditions do not apply, ranking by profitability index may not give the optimal combination. *Under capital rationing , the combination that gives the highest NPV should be selected.

EXAMPLE 18: Proposal 3 1 2 4 Initial outlay -200,000 -125,000 - 175,000 -150,000 PI 1.15 1.13 1.11 1.08 NPV $ 30,000 16,250 19,250 12,000

If budget constraint was $ 300,000, proposals 2 and 1 should be selected rather than proposal 3 which has the highest profitability index. Total NPV generated by proposals 1 and 2 are $ 35,500.

With multiperiod analysis, the postponement of investments is possible until a subsequent period when the budget will permit investment.

ALTERNATIVE NPV CALCULATIONS

A project has an economic life of two years and an initial investment of $ 100,000. The company plans to finance 50% of this investment using debt and 50% from equity. The before tax cost of debt is 10% and cost of equity is 16%. Corporate tax rate is 40%. The cost of equity for an all equity financed firm is 13%. The revenues and operating expenses related to the project are $150,000 and $ 60,000, respectively.The machine is depreciated on a straight line basis. Find NPV of the project. A.WACC APPROACH
Year 1 150,000 (60,000) (50,000) 40,000 (16,000) 24,000 50,000 74,000 Year 2 150,000 (60,000) (50,000) 40,000 16,000) 24,000 50,000 74,000

Revenues Operating costs Depreciation expense Operating Income Taxes(40%) Net operating income Depreciation expense Net operating cash flows

NPV= -100,000+ 74,000 + 74,000 (1.11)1 (1.11)2 = $ 26,727 Note the weighted average cost of capital is:
kw= ( 0.50)( 0.10)( 0.60)+ ( 0.50)(0.16) = 11%

B. EQUITY RESIDUAL

METHOD
Year 1 Year 2
40,000 ( 5,000) 35,000 (14,000) 21,000 50,000 71,000 (50,000) 21,000

Operating profit Interest * Earnings before taxes Taxes Net Income Depreciation Net cash flow Principal repayments Net cash to equityholders * 50,000x0.10= 5000

40,000 (5,000) 35,000 (14,000) 21,000 50,000 71,000 71,000

Net present Value:

NPV= -50,000 + 71,000 + 21,000 ( 1.16)1 (1.16)2 = $26,813

C. ADJUSTED PRESENT VALUE METHOD

NPV= PV of cash flows+ PV of tax savings PV of cash flows= -100,000+ 74,000 + 74,000 (1.13)1 (1.13)2

Tax savings= 5,000 (0.40) = 2,000

PV of tax savings= 2000+ 2000 (1.10)1 (1.10)2 = 3,471 APV= 23,440+ 3471 = $26,911 In general terms: APV= NPV at opportunity +PV of financing side effects cost of capital ( Base case NPV)

These methods give different figures for NPV. The ERM and WACC methods are comparable if the value of debt outstanding is a constant porportion of the remaining cash flows, which implies a constant debt ratio.APV is comparable to the other two only if the project life can be described as either one period or as infinite with constant perpetual flows in all periods. The WACC formula picks up only one financing side effect: the value of interest tax shields on debt supported by the project.If there are other side effects,subsidized financing tied to a project ,you should use APV. Financing side effects may be: 1.Issue costs: If accepting the project forces the firm to issue securities,then the PV of issue costs should be subtracted from the base case NPV. 2.Interest tax shields:Debt interest is a tax deductable expense.Thus a project that prompts the firm to borrow more generates additional value.The projects APV is increased by the PV of interest tax shields on debt the project supports. 3.Special financing: Sometimes special financing opportunities are tied to project acceptance.The government may offer subsidized financing for socially desirable projects.You calculate the PV of the financing opportunity and add it to the base case NPV.

CASE: EVA AND CAPITAL BUDGETING DECISIONS

EVA and CAPITAL BUDGETING DECISIONS

Henry Bodenheimer started Bodies Blimps, one of the largest high speed blimp manufacturers.His projects grew rapidly,in some cases becoming whole divisions.He needs to evaluate the performance of these divisions to reward the managers. Henry first measured the performance of his various divisions using ROA, paying a bonus to each of the division managers based on ROA of his division.While ROA was generally effective motivating the managers , there were a number of situations where ROA was counterproductive. Henry always believed that Sharon Smith, the head of the supersonic division was his best manager.The ROA of Smiths division was generally in the high double digits but the cost of capital was 20%.Furthermore , the division had been growing rapidly.However, as soon as Henry paid bonuses based on ROA, the division stopped growing.At that time, Smiths division had a ROA of 100%( $ 2 mil/ $ 2 mil). Henry found out why the growth had stopped when he suggested a project to Smith that would earn $ 1 million per year on an investment of $ 2 million.This would be an attractive project with a ROA of 50%( $ 1 mil/ $ 2 mil).He thought that Smith would jump to place this project in her division because ROA was much higher than the cost of capital of 20%.But Smith did everything to kill the project.Smith realized that if the project was accepted, the divisions ROA would be 75%. 2 mil+ 1 mil /2 mil+ 2mil = 75% Henry was later exposed to the EVA approach which seems to obviate this poblem. If EVA is used: EVA ( without project)= (100%- 20%) x 2,000,000= $ 1,600,000 EVA( with the new project)= ( 75%- 20%)x 4,000,000= $ 2,200,000 Questions: 1.Why did ROA decrease while EVA increased? 2.Which is a better performance indicator for a compensation system? 3.What is the difference between performance measurement and capital budgeting ? 4.Discuss the advantages and disadvantages of ROA and EVA when used in capital budgeting decisions.