Introduction to Finance

Internal Financial Data
Nonfinancial Data
Investment costs (fixed assets and working capital)
Distribution channels
Market studies and estimates of revenues, costs,
cash 
flows
Quantity, quality of labor force in different 
global 
locations
Financing costs (cost of capital)
Labor–management relations
Transportation costs
Status of technological change in the industry
Publicly available information on competitor’s 
plans, operating results
Competitive analysis of the industry, potential 
reaction of competitors
7
Thaddeus Herrick, “Big Oil Firms Trim Exploration Spending,” 
The Wall Street Journal
, (September 26, 2000), 
p. A2; Anne Reifenberg, “Big Oil Opens Capital-Spending Spigot for Overseas Projects Amid Price Slump,” 
The 
Wall Street Journal
, (January 3, 1996), p. A2.

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17.3 Capital Budgeting Techniques—Net Present Value
527
In recent years, energy prices, and oil prices in particular have become more volatile, 
rising through 2008, falling sharply in Great Recession, rising again through 2014 before 
falling again during 2014–2016. This trend of volatility has led many companies in energy-
intensive sectors to design new ways of operating and to initiate capital budgeting projects 
that will lower energy costs. Indeed, many sectors of the economy are becoming more green 
and incorporating sustainability as a major focus of their business strategies.
8
In this context, 
“sustainability” refers less to keeping the business operating into the future and more about 
the use of materials for indefi nite periods without causing environmental damage or depleting 
resources. The focus of such projects is to reduce waste and conserve natural resources. Sus-
tainable strategies will seek to use renewable resources. Whereas some fear we may someday 
deplete oil reserves, there is less concern over naturally renewable (and potentially carbon-
reducing) energy sources, such as wind, wave, solar, and nuclear energy and biofuels from 
corn, soybeans, and algae.
Such concerns are large for transportation-related industries, such as trucking, railroad, 
and airline carriers and for those who use the services of the retail and capital goods sectors. 
When fuel costs are low, just-in-time (JIT) inventory systems with daily shipments make sense 
in order to keep inventory costs down. But higher energy prices will be passed on by ship-
pers and suppliers, so inventory storage and warehouse decisions take prominence over JIT 
effi
ciency. Some estimate that corporate supply chain transportation costs consume about 7 
percent of energy in developed economies. As a result, fi rms are looking at ways to lower costs 
and dependence on oil by upgrading truck fl eets with auxiliary power systems, tire infl ation 
sensors, and better aerodynamics. They are considering projects to replace large trucks with 
smaller, more fuel-effi
cient vehicles for deliveries into congested areas. Smaller warehouses 
closer together rather than mega warehouses miles from the product’s fi nal destination may 
help lower transportation costs, too. Even loading a truck becomes a science, in an eff ort to use 
the available space as effi
ciently as possible and reduce trips and energy costs.
Energy price trends may also aff ect exports and imports. High fuel bills will lead to lower 
corporate profi ts, and some costs will pass through to consumers. Industries that rely heavily 
on imported goods from overseas may want to consider the energy benefi ts for producing 
those goods at home rather than paying higher shipping costs.