Capital Budgeting

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Capital Budgeting |

Team 2 Group Project |

Stacey CrawfordMichael CrokerWesley DrummMilissa HartwellSylvia HerryMarilyn Morales |

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MBA 612

April 29, 2014

Table of Contents

1. Capital Budgeting: An Overview

2. Glossary of Capital Budgeting Concepts

3. Summary of Analysis

4. NPV Scenario/Risk Analysis: Cost of Capital and Changing Salvage Values

5. NPV Scenario/Risk Analysis: Cost of Capital and Changing Year One Sales Level Assumptions

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1. Capital Budgeting: An Overview

A capital budget is a plan of expenditures for long term assets or projects that are intended to support the operations of a firm or to produce income for a firm. The budget may include, in addition to the asset or project itself, costs for acquisition, building or other non-routine items. A capital budget is part of a comprehensive business plan or the annual operating budget. Capital budget expenditures are most typically financed with medium to long term debt and are usually depreciated over time.

The capital budgeting process begins with identifying potential investments. Once identified, opportunities are analyzed and prioritized based on their probability to create shareholder value. After selection, the projects are then implemented and monitored. From a corporate finance perspective, the most critical portion of the capital budgeting process is centered upon the analysis of opportunities.

To properly analyze investment opportunities, one must have a tool that is easy to apply and explain to both financial and non-financial professionals. The tool must focus not on accounting standards but on cash flows, both inflows and outflows. The tool must include an assessment of the time value of money and make adjustments for risk. Finally, the tool must aid in the selection of projects that ultimately lead to increasing the value of the firm. There are several tools widely used in businesses today. Some of the tools meet all of...