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The Capital Budgeting Process

The Capital Budgeting Process

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Published by Syed Arbab Ahmed

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Published by: Syed Arbab Ahmed on Feb 09, 2011
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07/03/2013

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Chapter 9CAPITALBUDGETINGPROCESS
Alex Tajirian
 
Capital Budgeting Process 9-2
©
morevalue.com, 1997
1. INTRODUCTION
#
Working with the left-hand-side of a balance sheet
#
CAPITAL BUDGETING
//
INVESTING in Long-term Assets
!
Definitions
"
Capital
:Fixed assets used in production
"
Budget
:Plan of in- and outflows during some period
"
Capital Budget
:A list of planned investment (i.e.,expenditures on fixed assets)outlays for different projects.
"
Capital Budgeting
:Process of selecting viableinvestment projects.
"
Financial investmentvs.economic investment
!
In this course, investments are needed in order to
:
"
Expand in existing markets.
"
Enter new markets.
"
Replace existing capital assets.
Alex Tajirian
 
Capital Budgeting Process 9-3
©
morevalue.com, 1997
!
Where do these projects come from?
"
Suggested by managers of plants & divisions
"
Upper management
!
Upper management approves these projects
!
Investment and financing decisions are independent.
!
Some common errors:
"
Expansion without incorporating cost of financing
"
Cost cutting without looking at revenue side
"
Ignoring alternative uses of capital
#
TOOLS CAN BE USED IN
:
!
M&As
!
Divestitures & spin-offs
!
Correct-sizing
!
Other
Alex Tajirian

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