CAPITAL BUDGETING

Capital Budgeting Worksheet

Capital budgeting is a process by which a company selects which long-term projects it will invest in.  These projects will usually be large in scale and require a sizeable up-front payment with benefits to be received in the years ahead.  Some important factors to consider in this type of analysis are the time value of money, depreciation, and taxes.

BENEFITS OF CAPITAL BUDGETING

Capital budgeting provides your organization with a detailed analysis of the expected returns from potential projects.  This will facilitate the selection of the most appropriate investment(s) in light of your company’s strategy.

THE CAPITAL BUDGETING PROCESS

• Develop a list of suitable potential projects in light of the formulated strategy
• Compile and input all of the necessary information for each of the projects
• Run the analysis and rank the potential projects based on necessity, cost, and return
• Advise on the implementation of the selected projects
• Follow up on performance of the projects selected to determine if they have met expectations and if not, why

FURTHER READING

These links elaborate on the topic at hand.  They serve as a good starting point for those companies that would like to learn more or would like to address these topics “in house.”  For those firms that prefer to continue to focus on their current responsibilities and would value the objective viewpoint of a professional from outside of the organization, click here.

“Capital Budgeting Techniques”
Excerpt:  “A complicating factor is that the inflows and outflows may not be comparable: cash outflows (costs) are typically concentrated at the time of the purchase, while cash inflows (benefits) may be spread over many years.” 

“CIR1110/DA138:  Capital Budgeting for a New Dairy Facility”
Excerpt:  “Capital expenditures, or investment costs, include all costs to bring the project into operation. They include the four main expense categories plus consulting fees, legal fees, permit fees, etc. In order to formulate an accurate estimate of capital expenditures…”

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