One of the most significant debates that the management team of a business can engage in is whether to spend funds on capital items or other activities. These capital items may involve increases in the productive capacity of a business, an investment in a new corporate headquarters, or perhaps a government-mandated installation of pollution controls. Some investments may be short-term in nature and not involve fixed assets, such as investments in a marketing campaign, product research, or employee training. There may be dozens or even hundreds of prospective investment proposals being forwarded from all over a business. The typical organization will have varying amounts of cash available to invest in these items, so the management team must have a system for determining which investments to make and which to avoid.
Capital Budgeting describes how requests for capital investments are documented and examined. It also covers the primary methods for determining whether a proposed investment is acceptable, as well as a number of strategic considerations. Lease or buy financing options are also discussed, along with a system of capital budgeting controls, giving you and your organization valuable knowledge on capital expenditures.
Upon successful completion of this course, participants will be able to:
- Recognize the alterations available for improving an investment proposal, why sunk costs are excluded from proposals, and the alternatives for capital rationing.
- Identify the market conditions in which different types of investments and investment decisions will be made.
- Cite the basis for discounted cash flow analysis, and how net present value can be used.
- Identify the elements of the cost of capital, and note how the cost of capital is calculated.
- Recognize the derivation of throughput, the best ways to improve financial results, and situations in which local optimization is occurring.
- Recognize the uses to which payback, real option, and complex environment analysis can be used to review investment proposals.
- Note the concepts involved in the lease or buy decision process, and the information to include in or exclude from the decision.
- Identify the issues to be verified as part of the analysis of a capital budgeting request form.
Table of Contents
Chapter 1 – Overview of Capital Budgeting
Overview of Capital Budgeting
The Capital Budgeting Application Form
Capital Expenditure Proposal Analysis
Capital Budgeting Problems
Capital Budgeting in a Budget Format
Capital Budgeting in the Absence of a Budget Model
Capital Budgeting with Minimal Cash
The Post Installation Review
Chapter 1 – Review Questions
Chapter 2 – Capital Budgeting Strategy
Capacity Expansion Strategy
Capacity Reduction Strategy
Additional Risk Factors for International Investments
Factors Impacting Future Asset Usage
Perceived Certainty of Future Demand
Impact of Financing Alternatives
Chapter 2 – Review Questions
Chapter 3 – Discounted Cash Flow Analysis
Time Value of Money
Present and Future Value Tables
Net Present Value
Scenario and Sensitivity Analysis
Internal Rate of Return
Incremental Internal Rate of Return
The Tax Rate
Cash Flow Analysis Issues
Chapter 3 – Review Questions
Chapter 4 – The Cost of Capital
Cost of Capital Derivation
Cost of Debt
Cost of Preferred Stock
Cost of Common Stock
Weighted Average Cost of Capital
Variations in the Cost of Capital
Adjustments to the Cost of Capital
Cost of Capital as a Threshold Value
Chapter 4 – Review Questions
Chapter 5 – Constraint Analysis
The Bottleneck Operation
The Inventory Buffer
Investment Decision Priorities
Priority 1 – Increases Throughput
Priority 2 – Reduces Invested Funds
Priority 3 – Reduces Expenses
Additional Investment Considerations
The Constraint Analysis Model
Increase Downstream Capacity
Increase Upstream Capacity
Increase Upstream Processing
Outsource to a Supplier
Chapter 5 – Review Questions
Chapter 6 – Other Capital Budgeting Analyses
The Payback Method
Accounting Rate of Return
The Outsourcing Decision
Research and Development Funding Analysis
Complex Systems Analysis
Chapter 6 – Review Questions
Chapter 7 – The Lease or Buy Decision
The Lease Arrangement
The Lease or Buy Decision
Chapter 7 – Review Questions
Chapter 8 – Capital Budgeting Controls
Capital Budgeting Controls
Chapter 8 – Review Questions
Review Question Answers and Rationales
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