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Summary MG5 financial management
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Summary for MG4, finanical management, IMEM, NHTV, Basics of financial management - P. de Boer, M.P. Brouwens, W. Koetzier Chapter 5, 6, 7, 8, 9 second edition
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FinanceChapter 5: capital budgeting
Capital budgeting: de process of planning expenditure on assets whose returns are expected
to extend beyond one year. It is analysing projects and deciding whether they should be
included in the capital budget.
5.1: capital budgeting projects and cash flow
capital budgeting: the investment of capital in assets.
Capital budgeting plans are made and assessed according to their feasibility (is it possible to
do) and profitability. How the plans are financed is of no concern.
To determine if the project merits further consideration, it is important to assess the extent
to which it contributes to the aims and objectives of the company. It is important to look at
continuity and profit targets.
Replacement investments: serve to sustain production capacity.
Expansion investments: designed to increase production capacity.
An investment will always generate further capital requirements for other assets. These
assets have to be taken into consideration when wanting to know if the investment is
worthwhile.
Capital budgeting project: the sum total of investments in interrelated fixed and current
assets.
When assessing a project the cash flow has to be taken into consideration to know if a
project is commercially viable.
Cash flow: the excess of gross revenue from the sale of products over expenditure related to
the purchasing and use of assets during a certain period.
When assessing a capital budgeting system, you have to look at cash flow, because:
Profit is a subjective concept.
The moment of payment is only limited incorporated in the calculation of profit.
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