Question

View the Capital Budgeting Lecture (Links to an external site.)Links to an external site.video, which provides some factors that should be considered in capital budgeting considerations.

Imagine the producers of this video ask you to appear in the video to offer two additional considerations in capital budgeting decisions. One consideration must be quantitative (numeric). The other must be qualitative (non-numeric). Write a script to describe capital budgeting considerations that you think are important for managers to consider. Your script should be 200 to 250 words.

Answer 1

When companies think of expanding its businesses, newer projects are evaluated to find the pros and cons of it. Capital budgeting methods are the ways through which managers find out a route to accept or reject proposals. In terms of numeric valuation, managers will fall back on the absolute and relative methodologies that justify a project. NPV determines an absolute metric that provides a direct value while IRR determines a relative value of the project. If there are relatively two projects which are mutually exclusive to one another then sometimes NPV might not be an ideal solution because it provides us with a figure irrespective of the investments values. In the same space IRR steps in which displays that in spite of having a bigger project a smaller project might turn out to be a better bet as the yield provided are lucrative in nature. IRR determines a relative value % which a project must generate irrespective of its investments. In terms of non-numeric considerations managers should look at the political, economic and current market scenarios which justify an investment irrespective of what the relative and absolute metrics determine. Investing in a political turmoil field will never reap benefits for the company even if the benefits are numerous in nature. In the same breath, the controlling perspective of the workforce are essential too as problems in the union and unrest environment will cause problems for the anticipated project.