“Capital budgeting, as used here, is concerned with evaluating the profitability of projects that involve large sums of money and that extend beyond one year” (Moustafa H., 1974). The author also stated that a company’s size and managerial preferences may also effect the expenditure of a project, and this is why capital budgeting is relevant. Mentioned in the article, managers can use capital budgeting for a variety of reasons, some of these include “large training programs, major R&D projects, advertising campaigns and even refunding of debt” (Moustafa H., 1974).
Methods for capital budgeting
A main point why capital budgeting is important:
· Methods of capital budgeting are well-known, however, they are not well understood. This means organizations are not getting the full benefit.
o A capital expenditure (large project dealing with a large sum of cash), are important in the sense of the size of the project and the effect(s) they can have on the future of the organization.
o More than likely, these types of projects/expenditures are irreversible, in the sense that liquidation of such investments after a commitment has been made is going to be costly.
o When a manager is well educated on the purpose and method of capital budgeting, than can make well informed decisions on whether or not a project or investment should be made.
Another important piece of information about capital budgeting, is that it is used evaluating for specific types of capital expenditures. These capital expenditures differ from other expenditures in the sense of cost and potential benefits. Only these benefits occur at different points in time, and that potential benefits may extend over a sum of years. It is important for managers to evaluate such large projects or investments because, “comparing dollars accrued today with dollars to be received in the future requirements some adjustments to allow for the time” (Moustafa H., 1974). This is due to the fact that a dollar in hand can be invested immediately, whereas a dollar to be received later requires a waiting period.
Capital budgeting begins with an idea, leads to a proposal, and then ends with a post-audit of the results. Before the proposal stage, a list of cash outlays and benefits has to be prepared (managers need to know the expenses and the potential benefits). Next, the author goes into detail about the four commonly used methods in capital budgeting, these are: payback, account rate of return (ARR), net present value (NPV), and discounted cash flow rate of return (DCFR).
The author wraps up the article with dozen things a manager should know. The most important to mention in opinion are: “no method is altogether good or altogether bad, watch for spurious accuracy (decisions should not be based on fractions, method and techniques cannot eliminate risk or relieve a manager of making the decision, and there is no substitute for good judgement” (Moustafa H., 1974).
Reaction
My reaction to the article, I believe the author did an excellent job explaining the importance of capital budgeting. Organizations’ from time to time, have to make strategic decisions that impact their future(s). Large investments or projects require large sums of money (an expense). Managers cannot just throw around money, as money is never endless for an organization. A large project or investment must be smart and beneficial to the organization overall. Otherwise it will be a waste of resources that may not be possible to recover. Like the author mentioned, large capital investments can have an impact on the future of an organization. Information such as that, expresses the importance of capital budgeting and how it can be used as a tool to evaluate large projects and investment decisions.
References
Kenton, W. (2022, March 10). Capital Budgeting: What It Is and Methods of Analysis. Retrieved from www.investopedia.com: https://
Moustafa H., A. (1974, October 1). What Every Manager Should Know About Capital Budgeting. Retrieved from eds-s-ebscohost-com.lopes.idm.
DQ1
Assessment Description
Using the GCU Library, locate a journal article about capital budgeting. In the subject line of your post, include the name of the article that you read. Then, in your initial post, provide a link to the article and a summary followed by your reaction to the article. The summary should be approximately 250 words and the reaction should be approximately 150 words. The summary should describe the major points of the article, and the reaction should demonstrate your interpretation of the article and how you can apply that knowledge. Do not choose an article that one of your classmates has already posted. To participate in follow-up discussion, choose one of the articles that a classmate has posted and provide your own reaction to it. Note: It will be challenging to find a relevant article if you do not use the library.
Please include proper citations in your discussion post. Points will be deducted if proper citations are not used.
DQ2
Review Case 9.32 in your textbook. Using the questions provided as a guide, explain what you would do if you were Amy in this situation.
Participate in follow-up discussion by debating whether Amy should report Tony as indicated in part D of the case. Ask questions and post comments regarding classmates’ posts, or respond to follow-up questions posted by the instructor.
Please include proper citations in your discussion post. Points will be deducted if proper citations are not used.
In the beginning of the article, the author describes the importance of capital budgeting and why it is important to for managers to know what it is and how it is applied. “Capital budgeting, as used here, is concerned with evaluating the profitability of projects that involve large sums of money and that extend beyond one year” (Moustafa H., 1974). The author also stated that a company’s size and managerial preferences may also effect the expenditure of a project, and this is why capital budgeting is relevant. Mentioned in the article, managers can use capital budgeting for a variety of reasons, some of these include “large training programs, major R&D projects, advertising campaigns and even refunding of debt” (Moustafa H., 1974).
A main point why capital budgeting is important:
· Methods of capital budgeting are well-known, however, they are not well understood. This means organizations are not getting the full benefit.
o A capital expenditure (large project dealing with a large sum of cash), are important in the sense of the size of the project and the effect(s) they can have on the future of the organization.
o More than likely, these types of projects/expenditures are irreversible, in the sense that liquidation of such investments after a commitment has been made is going to be costly.
o When a manager is well educated on the purpose and method of capital budgeting, than can make well informed decisions on whether or not a project or investment should be made.
Another important piece of information about capital budgeting, is that it is used evaluating for specific types of capital expenditures. These capital expenditures differ from other expenditures in the sense of cost and potential benefits. Only these benefits occur at different points in time, and that potential benefits may extend over a sum of years. It is important for managers to evaluate such large projects or investments because, “comparing dollars accrued today with dollars to be received in the future requirements some adjustments to allow for the time” (Moustafa H., 1974). This is due to the fact that a dollar in hand can be invested immediately, whereas a dollar to be received later requires a waiting period.
Capital budgeting begins with an idea, leads to a proposal, and then ends with a post-audit of the results. Before the proposal stage, a list of cash outlays and benefits has to be prepared (managers need to know the expenses and the potential benefits). Next, the author goes into detail about the four commonly used methods in capital budgeting, these are: payback, account rate of return (ARR), net present value (NPV), and discounted cash flow rate of return (DCFR).
The author wraps up the article with dozen things a manager should know. The most important to mention in opinion are: “no method is altogether good or altogether bad, watch for spurious accuracy (decisions should not be based on fractions, method and techniques cannot eliminate risk or relieve a manager of making the decision, and there is no substitute for good judgement” (Moustafa H., 1974).
Reaction
My reaction to the article, I believe the author did an excellent job explaining the importance of capital budgeting. Organizations’ from time to time, have to make strategic decisions that impact their future(s). Large investments or projects require large sums of money (an expense). Managers cannot just throw around money, as money is never endless for an organization. A large project or investment must be smart and beneficial to the organization overall. Otherwise it will be a waste of resources that may not be possible to recover. Like the author mentioned, large capital investments can have an impact on the future of an organization. Information such as that, expresses the importance of capital budgeting and how it can be used as a tool to evaluate large projects and investment decisions.
References
Kenton, W. (2022, March 10). Capital Budgeting: What It Is and Methods of Analysis. Retrieved from www.investopedia.com: https://
Moustafa H., A. (1974, October 1). What Every Manager Should Know About Capital Budgeting. Retrieved from eds-s-ebscohost-com.lopes.idm.
