Question

Pleast list 4 reasons why a successful capital investment and budgeting process could be described as the arterial system or nerve center or criticl process for an organization. For illustration, one example might be that "the capital investment budgeting system is the primary way in which critical operating resources flow to the many divisions within the organization. Without operating resources, the divisions within the organization will shut down."

Even just ONE would help!!! Thanks :)

Answer 1

Successful capital investment and budgeting process to be adopt

1. To evaluate cost and benefit of each investment at the initial stage because capital expenditure are long term investment and involved financial risk. ( cost benefit analysis using Net present value method (NPV) , IRR rate, Pay back period Etc)

2.To complete project within period and in controlled cost. Periodly review Actual cost with Budget and forecast cost to eliminate over or under investment.

3. As investment are huge and funds are limited, proper planning of capital expenditure is prerequisite. Also all capital investment decisions are irreversible in nature I.e. once capital asset purchased it's disposal may incurr huge losses.

Example to understand return on investment

An equipment cost $15000 and expected cash flow at end of 2 years $20000 . There is an inflation rate of 18% per year . Without considering inflation the investment is feasible as there is a return of $5000 at end of 2nd year .

But by considering inflation and to arrive net present value of casflow expected to receive at end of 2nd year is $ 14363.68 (($20000/(1+0.18))/(1+0.18)))  

Hence by considering inflation there is a loss of $636.32 if we make investment

Conclusion - investment should not be made as there is a loss by end of project.