Using simulations to teach capital budgeting

Harvard Business Publishing offers the online simulation “Capital Budgeting“:

“In this single-player simulation, students act as members of the Capital Committee of New Heritage Doll Company, tasked with selecting and allocating capital across the company’s three divisions. Students evaluate a diverse set of competing investment proposals and make decisions regarding 27 separate proposals over a five-year period. Students confront a range of project types including replacement investments, expansion investments, investments in mutually exclusive projects, interdependent projects, and projects with growth options. To evaluate them, students examine outlays, cash flow patterns, and common metrics such as NPV, IRR, and Payback, with or without capital constraints” (source).

I used this simulation in my undergraduate Corporate Finance course and found it very useful: Students get to see how the tools they learned in the course apply to the real world. Every student had to play the simulation at least three times, but some students played it over 20 times.

While the list price is $45 per student, it costs only $15 per student if you have an educator account and make it available as part of a course pack. I highly recommend this simulation.

If you have experience with this or other simulations, please share your experience in a comment or email me at kai@accepi.com to write a guest post.

Initial set-up

  • Create “Standard” scenario
    • Annual constraint
    • Randomize project 24 outcome
    • Display correct project rate
    • Fixed portion: $8m per year
    • 0% of EBITDA
    • 0% fraction of unused budget available in future years
  • Manage users
    • Assign all users to Standard scenario
  • General settings
    • Choose “Students may play through the entire simulation”
  • Demo the simulation in class

Instructions for students

  • Please play at least twice by Sunday, 11:59PM
    • You can play as many times as you want
  • Scoring: You get
    • 1.5 points for each run (up to 3 points)
    • +1 point if you get an APV > 579 in your best run
    • +1 point if you get an APV > 600 in your best run
  • Note that the profitability index is defined as NPV / initial cost in the simulation.

 

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