Capital Budgeting

Learning Objectives

• To identify capital budgeting and the steps undertaken in developing and implementing capital budgets.
• To recognize relevant and irrelevant costs related to capital budgeting.
• To identify and calculate the pre-tax and post-tax cash flows related to - the initial investment of a capital project - during the period the project is in operation from revenue, operating expense, and changes to working capital - the end of a capital projects life.
• To explore the methods payback method, discounted payback method, NPV, IRR for acceptability of a project, advantage, and limitations.
• To identify capital rationing, mutually exclusive, and independent projects.
• To recognize why cash flows and discount rates should be adjusted if project cash flows are more or less risky than normal.
• To identify alternative approaches to dealing with risk in capital investments.
• To recognize capital budgeting risk analysis techniques
• To identify the rationale for using real options to mitigate project risk, different types of real options available to management, and the problems comparing projects of unequal sizes and/or unequal lives.

Course Description

Several factors make investment decisions using capital budgeting one of the most important functions.  Capital budgeting and improvement plans are all about projects requiring collaboration across multiple departments touching disparate systems such as budgeting, performance, reporting, and communications. Financial managers in long term decision making based on capital budgeting are also involved with: 

• Capital used to fund investment projects is limited, and must be carefully allocated across the entire business. 
• Investments require the use of large amount of cash, limiting future financial flexibility. 
• If a firm invests too much into a capital project, it could have high depreciation on an asset with limited value. 
• If a firm invests too little into a capital project, it may have limited capacity, putting it at a disadvantage versus competitors. 
• Timing is important, ideally investment projects are completed as close to when they are needed. 

This webinar provides an overview of the concepts of capital budgeting for investment decision making from the perspective of a finance and accounting organization, emphasizing the integration of cash flows, net present value analysis, risk assessment and risk management. The webinar starts with an overview of the capital budgeting process and then reviews the analysis of cash flows during the development, operating and end of project phases. 

Topics include: 

• Capital Budgeting Process
• Cash Flow Analysis
• Payback and Discounted Payback
• Net Present Value (NPV) and Internal Rate of Return (IRR)
• Risk Analysis in Capital Budgeting
• Evaluating and Ranking Capital Projects
• Risk Mitigation Using Real Options

Overview

• Capital Expenditures

  4 mins
• Impact of Taxes on Cash Flows

  16 mins
• Ongoing Scenario: Initial Investments

  31 mins
• Operating Cash Flows Module Wrap Up

  45 mins
• Using Discounted Payback For Acceptance

  72 mins
• Comparing NPV and IRR

  88 mins
• Probability - Weighting Cash Flows

  111 mins
• Risk Mitigation Using Real Options - Module Objectives

  120 mins