Capital budgeting is the process for making long-term investment
decisions, what do you think a company needs to determine beyond finance
if this is a good project for the company?
Cost reduction decision like should we buy new equipment to reduce cost. Expansion decision like should we get a new warehouse, building, or other things to increase sales. Equipment selection like which equipment is cheaper and more productive. Lease or buy decision which one will benefit us in the long run. Equipment replacement like should we replace or buy new equipment to save cost and increase output. Capital budgeting is needed because it can help with investing decision and helps the company in the long run by showing areas of improvement.
I am glad you talked about how capital budgeting is the planning process used to determine which of an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. Windows of opportunity come into play when budgeting for capital because they can provide opportunities for firms to maximize returns on investment.
Long term investments involve certain levels of risk. The first step for the inclusion of risk into the capital budgeting process is to decide whether a project should be analyzed solely by itself as if it were a stand alone project that has no impact on the risk associated with the firm. Does the investment reduce the risk associated with the firm? Some long-term investments rapidly generate returns while other require years to develop and then may never generate a profit.
True some companies do acquire long term investments that may not generate a profit, that's why before the investment is made the try to measure out all of the risks. Firms also try to get as much of a return on the long term investment as possible by sometimes adding installation or removal.
While most small firm owners have a good sense of what’s happening at their firms, operational indicators such as cash flow shortages or mounting receivables don’t tell the whole story. Strategic decisions including hiring and moving to a larger office require understanding of financial trends on both a macro and micro level.
Financial management involves tracking financial indicators pertinent to firm financial health and using the information to project future performance. This work does not need to be done by firm owners themselves, but it is essential to overall firm development. Without some reasonable expectations of future revenue, expenses and profitability, it is difficult to plan and make basic business decisions.
Beyond the financial standpoint of capital budgeting, the first thing that may need to be determined is whether the project is beneficial to the company. A lot should be considered, in health care, let’s say I wanted to have a health fair, I would have to first evaluate the needs of the community. I would then have to contact our external affairs department to speak with community leaders, propose the health fair. I have to evaluate location and space, contact marketing for advertising, vendors for supplies and hire staff to work the fair.
Hey Meredith I think a company needs to determine if the project would benefit the company also. Getting others opinions would be a good idea before doing the project and risk a lot. Have a good day:)
Well if you look at accounting measures which are the most basic ways if measuring the success of a business then the balanced scorecard offers a solution when a problem arises with accounting measures. Then the triple bottom line considers the social and environmental success of the and the method of benchmarking which measures success and continues to improve these are things to determine beyond financing if the project is a good fit for the company
I think a company needs common sense and good judgment to determine what the company needs to determine beyond finance if this is a good project for the company.
Beyond finance a company must look to see if the investment is worth it. The need to check the NPV and the IRR of the investment. A firm must also look at the risks involved in the investment of the new plant/equipment. For example, is this long term investment for new product or an existing product. That can also play a factor in determining if the long term investment is valuable to the firm.
Brenda, thanks for reminding me of the net present value and the internal rate of return, because I was under the impression that those factors are included in financial decision making.
In addition to finance, managers need to decide which long term investments to make. For example, should an old machine be replaced by a new machine? Should the level of operation of the firm be expanded by purchasing new plant and equipment? Which of the two competing new machines should the firm purchase? There decisions are paramount to the life and profitability of the firm. To make such decisions, companies determine net present value, and internal rate of return, to see which decisions should be made.
since Companies are dealing with major capital budgeting it is very important for the company to have the proper working equipments to work with by making sure the company is running smoothly. In addition companies before making a long-term investment it is very important to know is the project will worth it right, and the total cost of it to get it done.
Cost reduction decision like should we buy new equipment to reduce cost.
ReplyDeleteExpansion decision like should we get a new warehouse, building, or other things to increase sales.
Equipment selection like which equipment is cheaper and more productive.
Lease or buy decision which one will benefit us in the long run.
Equipment replacement like should we replace or buy new equipment to save cost and increase output.
Capital budgeting is needed because it can help with investing decision and helps the company in the long run by showing areas of improvement.
I am glad you talked about how capital budgeting is the planning process used to determine which of an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. Windows of opportunity come into play when budgeting for capital because they can provide opportunities for firms to maximize returns on investment.
DeleteThis is a good example, cost reduction and budgeting go hand in hand when it comes to the financing of a company.
DeleteI agree with Renita, this was a good example
DeleteLong term investments involve certain levels of risk. The first step for the inclusion of risk into the capital budgeting process is to decide whether a project should be analyzed solely by itself as if it were a stand alone project that has no impact on the risk associated with the firm. Does the investment reduce the risk associated with the firm? Some long-term investments rapidly generate returns while other require years to develop and then may never generate a profit.
ReplyDeletelong term will always have a better benefit when it comes to a company developing a sense of rapid response.
DeleteTrue some companies do acquire long term investments that may not generate a profit, that's why before the investment is made the try to measure out all of the risks. Firms also try to get as much of a return on the long term investment as possible by sometimes adding installation or removal.
DeleteWhile most small firm owners have a good sense of what’s happening at their firms, operational indicators such as cash flow shortages or mounting receivables don’t tell the whole story. Strategic decisions including hiring and moving to a larger office require understanding of financial trends on both a macro and micro level.
ReplyDeleteFinancial management involves tracking financial indicators pertinent to firm financial health and using the information to project future performance. This work does not need to be done by firm owners themselves, but it is essential to overall firm development. Without some reasonable expectations of future revenue, expenses and profitability, it is difficult to plan and make basic business decisions.
Reads well
DeleteBeyond the financial standpoint of capital budgeting, the first thing that may need to be determined is whether the project is beneficial to the company. A lot should be considered, in health care, let’s say I wanted to have a health fair, I would have to first evaluate the needs of the community. I would then have to contact our external affairs department to speak with community leaders, propose the health fair. I have to evaluate location and space, contact marketing for advertising, vendors for supplies and hire staff to work the fair.
ReplyDeleteHey Meredith I think a company needs to determine if the project would benefit the company also. Getting others opinions would be a good idea before doing the project and risk a lot. Have a good day:)
DeleteWell if you look at accounting measures which are the most basic ways if measuring the success of a business then the balanced scorecard offers a solution when a problem arises with accounting measures. Then the triple bottom line considers the social and environmental success of the and the method of benchmarking which measures success and continues to improve these are things to determine beyond financing if the project is a good fit for the company
ReplyDeleteI think a company needs common sense and good judgment to determine what the company needs to determine beyond finance if this is a good project for the company.
ReplyDeleteI agree Barbara! A company should have good judgment, which will help the company determine if the project is worth the investment.
DeleteBeyond finance a company must look to see if the investment is worth it. The need to check the NPV and the IRR of the investment. A firm must also look at the risks involved in the investment of the new plant/equipment. For example, is this long term investment for new product or an existing product. That can also play a factor in determining if the long term investment is valuable to the firm.
ReplyDeleteBrenda, thanks for reminding me of the net present value and the internal rate of return, because I was under the impression that those factors are included in financial decision making.
DeleteIn addition to finance, managers need to decide which long term investments to make. For example, should an old machine be replaced by a new machine? Should the level of operation of the firm be expanded by purchasing new plant and equipment? Which of the two competing new machines should the firm purchase? There decisions are paramount to the life and profitability of the firm. To make such decisions, companies determine net present value, and internal rate of return, to see which decisions should be made.
ReplyDeletesince Companies are dealing with major capital budgeting it is very important for the company to have the proper working equipments to work with by making sure the company is running smoothly. In addition companies before making a long-term investment it is very important to know is the project will worth it right, and the total cost of it to get it done.
ReplyDelete