Capital budgeting

I'm not quite ready.

So let's finish the very last pieces of capital budgeting.

The last session...

I started talking about product cannibalization, right? Product cannibalization refers to the fact that if you're a big company opening a new store or introducing a new product, some of your revenues come from your existing product.

You see where I'm going? The revenues I gave you were the total revenues in the theme park, and now I'm saying 20% of those revenues you'd have had anywhere.

So think purely in terms of mechanics.

When you do the capital budgeting for the theme park, Should you count only the 80% that is incremental? Should you count the entire 100% saying that's what this theme park brings in? Or should you go with the number in the middle? It's going to make a huge effect, right? If I take 20%, I'll tell you up front, I tried this.

I took 20% of the revenues out of the theme park.

Let's wrap up today with a fun fact.

The internal rate of return was first formalized as a capital budgeting tool by the economist Joel Dean in his 1951 book Capital Budgeting.

Dean argued that IRR was superior to much simpler payback period calculations because it accounted for the time value of money.

What he did not anticipate was that IRR would become so dominant in investment analysis that it would be used as the sole decision metric stripped of the contextual framework he originally attended.