Question

Compare the results of good vs poor capital budgeting decisions on an organization, be specific on the long term impact to the organization and describe characteristics included in the definition of capital budgeting.

Provide an example of a capital budgeting project for a church

Answer 1

Capital budgeting is the decision with regards to where the capex or capital of the firm should be spent to enhance growth of the firm and value of the shareholders

Good capital budgeting can help firms grow while bad ones can destroy immense value

Let us take an example of a restaurant chain, who has a specilization in fast food.

They have a lot of cash of their book and decide to diversify and enter into the fashion retail business. They have no idea about the fashion industry and within 3 years of entering into that industry, they need to declare bankruptcy. this is a very bad capital allocation decision

On the other hand, if they had acquired one of their suppliers, their margins would have expanded and their business profitability would have improved, that is a good capital allocation decision.

For a church, capital budgetting could be renovation of the church, buying land for expansion of a church, buying a centralized air conditioning unit for the church