FREE online courses on Capital Budgeting Analysis - Additional Considerations in Capital Budgeting Analysis - Course Summary

 

The long-term investments we make today determines the value we will have tomorrow. Therefore, capital budgeting analysis is critical to creating value within financial management. And the only certainty within capital budgeting is uncertainty. Therefore, one of the biggest challenges in capital budgeting is to manage uncertainty. We deal with uncertainty through a three-stage process:

 

Build knowledge through decision analysis.

Recognize and encourage options within projects.

Invest based on economic criteria that have realistic economic assumptions.

 

Once we have completed the three-stage process (as outlined above), we evaluate capital projects using a mix of economic criteria that adheres to the principles of financial management. Three good economic criteria are Net Present Value, Modified Internal Rate of Return, and Discounted Payback.  

 

Additionally, we need to manage project risk differently than we would manage uncertainty. We have several tools to help us manage risks, such as increasing the discount rate. Finally, we want to implement post analysis and tracking of projects after we have made the investment. This helps eliminate bias and errors in the capital budgeting process.