Chapter 6 - Investment decisions - Capital budgeting

A systematic approach to capital budgeting implies:

a) the formulation of long-term goalsb) the creative search for and identification of new investment opportunitiesc) classification of projects and recognition of economically and/or statistically dependent proposalsd) the estimation and forecasting of current and future cash flowse) a suitable administrative framework capable of transferring the required information to the decision levelf) the controlling of expenditures and careful monitoring of crucial aspects of project executiong) a set of decision rules which can differentiate acceptable from unacceptable alternatives is required.
The last point (g) is crucial and this is the subject of later sections of the chapter.a) By project sizeSmall projects may be approved by departmental managers.

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The chapter ends by showing how marketers can take this in to account.A capital investment project can be distinguished from current expenditures by two features:

a) such projects are relatively large
b) a significant period of time (more than one year) elapses between the investment outlay and the receipt of the benefits..
As a result, most medium-sized and large organisations have developed special procedures and methods for dealing with these decisions.

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Is the product worth investing in?Accounting rate of return
Capital budgeting
Cash flow
Classification of investment projects
Compound interest
Current cost accounting (CCA)
Current purchasing power (CPP)
Dependent projects
Independent projects
Interest rate
Internal rate of return
Investment decision
Net present value
Payback period
Present value
Rates of return
The time value of money

The timing of cash flows are important in new investment decisions and so the chapter looks at this
Typical investment decisions include the decision to build another grain silo, cotton gin or cold store or invest in a new distribution depot.

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Differences in the scale of investmentNPV and IRR may give conflicting decisions where projects differ in their scale of investment.

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