Our textbook and lesson discuss some considerations that should be taken into account when doing capital budgeting: incremental earnings, interest expenses, taxes, opportunity costs, externalities, sunk costs, cannibalization or erosion, depreciation, salvage value, and others. For your first post,...
Week 6: Capital Budgeting
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Our textbook and lesson discuss some considerations that should be taken into account
when doing capital budgeting: incremental earnings, interest expenses, taxes,
opportunity costs, externalities, sunk costs, cannibalization or erosion, depreciation,
salvage value, and others. For your first post, explain in detail what defines capital
budgeting. Then explain how two of the considerations above affect capital budgeting.
**For full credit reply to the prompt and to another student's response. You should have
two postings for your 20 points.
Collapse SubdiscussionAndre Chilton
Andre Chilton
Feb 10, 2021Feb 10 at 3:12am
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Cash Flow Assessment: Another vital part of the capital budgeting process is cash
flow assessment. When looking at a new project, we to come up with a cash flow
plan for it. We need to estimate the amount of cash that will take to complete the
project and how much cash it will require going forward. This often requires the
consultation of several different experts. The second part of the cash flow
assessment process helps us determine how much money is project could bring in.
When calculating these numbers do not ever use the best case scenario. Use
numbers that are more realistic for your assessment. This part of the process helps
you determine whether the project is viable or not.
Making Decisions: Ultimately, the objective of capital budgeting is to help us make
decisions that are smart for the business. Taking the necessary steps to evaluate
each opportunity can help us avoid disastrous consequences for business.
Therefore, the capital budgeting process is crucial to consider before making any big
decisions for any type of project.
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Collapse SubdiscussionAljohn Fajardo
Aljohn Fajardo
Feb 10, 2021Feb 10 at 9:09am
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Hey Andre,
I do believe that cash flow assessment is crucial to any project. Without
understanding the cash flow completing projects or development of a building could
fail halfway through. You mentioned that cash flow also goes along with how much
money the project can bring in, I would be more inclined to think that would be more
opportunity cost. The project' cash flows show how the project will be funded from
start to finish but once the project is done, the opportunity of profit should be the
driving factor. Interesting that you choose decision making as your second choice. I
do believe that each step of a project should be thought out thoroughly. If bad
decisions are bad, then the capital budgeting could go way over budget.
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Collapse SubdiscussionShari Cash
Shari Cash
Feb 14, 2021Feb 14 at 9:52pm
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Great explanation of cash flow assessments Andre. I agree, cash flow assessment
is definitely a vital part to the capital budgeting process. In order to start a project or
an investment; the money needs to be there first. Some businesses will be in a good
position to start a project because they have the cash while others will need to fund
their project by other means. This can all be determined by doing a cash flow
assessment. This will give the business insight on whether if they have enough cash
on hand to fund the project. The cash flow assessment is also useful is determining
how much cash is going to be needed across the life of the project as well as what
potential revenues could be made.
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Collapse SubdiscussionLuis Reynoso
, Luis Reynoso
Dec 26, 2020Dec 26, 2020 at 1:33pm
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Capital Budgeting is the process used by businesses for evaluation of capital
investment decisions like an investment in a new plant & machinery, expansion of
existing production site, etc.
There are various elements that impact capital budgeting. The following two
elements affect the capital budgeting as follows:
1. Incremental earnings: More the incremental earnings faster the payback for the
investment made. Therefore, it is important to identify and assess the quantum of
incremental earnings from the project undertaken. For example: If additional
machinery is added in the plant, how many additional units plant can manufacture
(increase in manufacturing capacity) and sell (increase in sales capacity)? And
therefore, how much incremental revenue can be earned by selling those additional
units? More the incremental revenue better the return on investment and a better
payback period.
2. Sunk Cost: These are the costs that have no impact on the capital budgeting as
these costs are already incurred and does not impact the go - no go decision for the
project as the amount spent cannot be recovered by any action or non-action. For
example Research cost incurred to understand the expansion potential for the plant,
cost of architecture for developing the design of the expansion (incurred at the time
of original plant design).
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Collapse SubdiscussionAlina Bell
Alina Bell
Feb 7, 2021Feb 7 at 3:09pm
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The retail store I used to work for operated out of an old building, and old grocery
store; over time, continued growth caused it to 'burst at the seams'. Literally, our
community always wondered when the store would expand. More space was
needed to be able to incorporate outdoor living, more lines of paint, expansion of the
new lines of products we carried like camping and fishing, and kids games, just to
name a few; we were in an building that needed upgraded technology (old wires, old
, surveillance system, old security system that caused fire-fighters to come out more
often than needed, old unleveled concrete floors...). We had to carefully budget
small capital improvements each year.
Working on our capital budgeting project this weekend, I realized that each
business, small or large, must follow the same rules when it comes to capital project
budgeting. Yes, it all comes down to money, but businesses must first answer the
WHY, HOW and WHEN to do capital investments.
Why - to reduce costs, be more profitable, expand or reduce operations, (even
reducing operations has its costs), change line of products produced or sold, invest
in technology to be more efficient, etc.
The How - comes from finding ways to fund projects. We had to re-negotiate our
lease and demand some improvements be done by the owners, some were done in
partnership with the property owners, and some were just for us to fund. Long term
loans were the answers here.
When - well... sometimes businesses have long lists of what they want to do, but
identifying needs versus wants is key. Sometimes CEOs may push for some
investments, when department heads have needs for others. Prioritizing and making
long term plans seemed to work for us.
Depreciation is one consideration when investing in assets, because different tax
treatments apply to different forms of businesses. Example: section 179 currently
allows businesses to deduct some investments instead of depreciating them over
the years. Depreciation methods, salvage value, and marginal tax rate should be
taken into account to maximize the return on investment.
Opportunity costs are evaluated to determine the return of investments over their
'next best' alternative. Net present value, IRR, payback periods will help quantify one
alternative versus the other.
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Collapse SubdiscussionAmber Conrad
Amber Conrad
Feb 11, 2021Feb 11 at 9:21am
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Alina,
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