Capital Budgeting

Capital Budgeting Analysis Project

The General Capital Budgeting Process and how it is implemented within Organizations

The general capital budgeting process is the tool by which an organization determines its choice of investments through analyzing and evaluating its cash in and out flows. The capital budget process is vital to the organizations mere existence. Capital budgeting decisions can mean the difference between the company’s survival and its extinction, especially in today’s volatile global economic environment. The goal of survival for an organization is to create the maximum amount of shareholder wealth. To achieve positive shareholder wealth, the organization must maximize its share price through creating a positive net present value. The organization cannot achieve shareholder wealth without the use and understanding of a solid capital budget process (Megginson, Smart, Graham, 2010).

Capital budgeting analysis is really a test to see if the benefits (cash inflows) are large enough to repay the company for three things  the cost of the asset, the cost of financing the asset (interest) and a rate of return (Investopedia, n.d.).

The capital budget process involves three basic steps:

1) Identifying potential investments. This is the “idea” phase. Ideas can come from anywhere and in various stages from just a thought (many times R &D) to an expansion of an existing business model or even a completely different business model than the organization is currently involved in (Megginson, Smart, Graham, 2010). Regardless of the investment, this step must include finding lucrative or key projects that will ultimately make money for the organization. While profit is the driving factor for an organization, this step may also include a long term plan to give the organization a competitive advantage for a more secure economic future. This step is often highly undervalued. Organizations do not survive without successful and profitable...