Question

How might the capital budgeting activities of a nonprofit organization be different from the capital spending decisions of a company?

Answer 1

Capital budgeting refers to the technique of project evaluation comprising of five to six methods to determine the financial viability of the project. As per its one of the most used method, that is, NPV, in this case where the NPV is positive then the project shall be selected otherwise most of the times, it will be rejected.

For a company, capital budgeting decisions will be proceeded further if the project is yielding positive NPV otherwise the company will reject it. If the NPV will be zero then in such case, company will be reject will the same. Therefore, for a company for its spending decisions must carefully look for positive NPV projects.

Whereas in case of non-profit organizations, such entities are not solely focused on choosing the projects with positive NPV. Such entities focus on completion of project within given time and cost contraints. Even if the NPV of the project will be negative then it can continue the project as their motive of running the organization is solely not related to profit rather general public utility.

Hence as per above analysis, capital budgeting decisions of a company could be different from capital budgeting decisions of a non profit organization.

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