Elle Meyer

AC548

Dr. Robinson

15 April 2023

Capital Budgeting

For this week’s article, I read “Companies Review Capital Budgets for Savings in

Uncertain Economy” written by Kristin Broughton on the Wall Street Journal. This article starts

off by explaining how Chief Financial Officers are putting capital budgeting projects on hold as

they try to cut back on spending with the recent economic shutdown (Broughton, 2022). Capital

budgeting is the idea of making something for pennies, selling for dollars, making long term

planning decisions for investment projects (Rajan, Horngren, Datar, et al, 2021). During the

second quarter of 2022, companies on the S&P 500 Index had put $187.4 billion into capital

expenditures, in which at least 88% have reported results from the investment (Broughton,

2022).

Further in the article, Kristin Broughton mentions a company, Tempur Sealy

International, a mattress-based company from Lexington KY (Broughton, 2022). Tempur Sealy

had to decide on whether to scale back on capital expenditures going into 2023 based on lowered

demand by consumers. Bhaskar Rao, Tempur Sealy’s CFO, had plans to spend north of $250

million on capital budgeting projects for the year, including a new foam-pouring plant, however

if a decision to pull back is made, the company would need to focus on their long-term growth

(Broughton, 2022). Focusing on capital expenditures and analyzing the impact is just one

example of how CFOs are preparing for the future. The decision to hinder a company’s growth

plans or slow down production comes with risks and could lead to the business being
overleveraged (Broughton, 2022). Simply meaning, the company has too much debt and not

enough current assets to pay it off in the short-term. CEO of Intel, David Zinsner, stated, “On a

long-term basis, we’re always looking at our CapEx in relationship to demand. We’re building

supply to meet demand and modulating that as the signals change.” (Broughton, 2022). This is

an important aspect for any capital budgeting project, if demand changes, a capital expenditure

must be analyzed to determine if cash flows will be sufficient.

Capital budgeting decisions are related to many pricing decisions for companies. With

this idea, managerial accountants can pair up with managerial financial personnel to determine

whether the capital budgeting project will produce a positive net present value. A general rule of

thumb for these capital expenditures, if NPV is greater than zero, the project can be accepted.

Based on our reading, managers are responsible for analyzing the lifetime expected cash flows

from the initial investment and determine if they are sufficient to produce revenue (Rajan,

Horngren, Datar, et al, 2021). Managerial accountants can help managers make costing

decisions with their capital budgeting plans. With economic fluctuations, competitive markets,

the type of project, and funding, capital budgeting expenditures consider a lot of thought to be

implemented. Managerial accountants can help companies make sure the capital expenditure is

aligned with their organizations strategy and then decide if the investment is worth the risk. If

the funding is obtainable and the future cash flows generate a positive net present value, the

company is off to a good start with the investment package.

 Works Cited

Broughton, K. (2022, August 15). Companies Review Capital Budgets for savings in uncertain

economy. The Wall Street Journal. Retrieved April 15, 2023, from

https://www.wsj.com/articles/companies-review-capital-budgets-for-savings-in-uncertain-

economy-11660555801

Datar, Srikant M., and Madhav Rajan. Horngren’s Cost Accounting: A Managerial Emphasis.

17th ed. Pearson Education, 2021.