- Credits: 2
- Format: Self-Study eBook
- Field of Study: Corporate Finance | Business | Industry
- Author/Speaker: Matt H. Evans
|Course ID:||Advanced Preparation:||Experience Level:|
|Published Date:||Program Prerequisites:||Other Course Formats:|
|© Jan 2020||General Understanding of Financing||N/A|
Capital Budgeting Analysis is a process of evaluating how we invest in capital assets; i.e. assets that provide cash flow benefits for more than one year. We will include three stages within Capital Budgeting Analysis: Decision Analysis for Knowledge Building, Option Pricing to Establish Position, Discounted Cash Flow (DCF) for making the Investment Decision.
The long-term investments we make today determine 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 managing 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 invested. This helps eliminate bias and errors in the capital budgeting process.
Who Should Attend:
- All Certified Public Accountants (CPAs)