4.1. Capital Budgeting Decisions Flashcards
Why capital budgeting is essential…
The process companies use when making investing decisions.
Essential as investment opportunities must be researched thoroughly as they cannot be reversed at low cost.
Essential as investment opportunities usually require a large outlay of cash so the corporation needs to know it is going to the correct place.
Steps in capital budgeting…
Generate ideas and search for investment opportunities: these ideas can come from all parts of the organisation and acts as the most important step.
Analyse the proposals and make the final decision. Financial managers will need to collect information to forecast cash flows of specific opportunities to determine if they are value added.
Implement an approved investment opportunity. Normally time consuming and involves many people to create and execute a plan.
Monitor the investment project and post-investment auditing to ensure the project is value added and profitable.
Types of investment opportunities…
Replacement projects: the easier project to capital budget for. If something breaks, should it be fixed?
Expansion projects: projects that aim to increase the size of the business. Require more careful analysis.
New products and service projects: releasing new products and services into the market are the most complex. This requires meticulous analysis and planning to see if the product will be taken well.
