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Capital Budgeting

This chapter goes over the Capital Budgeting process. Capital Budgeting will help firms identify profitable projects so it can earn a return. Why? If a firm wants to stay viable, it will need to invest and innovate to stay ahead of its competition which is also investing and innovating. The question then becomes, what is the most cost effective and profitable way to invest the firm's scarce resources? Capital Budgeting attempts to answer this conundrum.


-Please provide an example from a real company that used capital budgeting for a particular product proposal.
-What were the results of that project?
-Can you think of any companies who didn't properly invest/innovate and are now defunct or on the way to closing?
-How can you use capital budgeting in your own lives?   

Answer 1

CAPITAL BUDGETING

Capital budgeting is a process that is used to decide which of the available investment proposal has to be taken up so that the company earns the best returns.

Some of the methods of capital budgeting includes:

• Net Present Value (NPV)
• Payback Period
• Discounted Payback
• Internal Rate of Return (IRR)

EXAMPLE OF A COMPANY THAT USES CAPITAL BUDGETING

Many companies use capital budgeting. As it is not mandatory to publish the decision making techniques or the processes used by the management for evaluation, detailed information may not be available to the public

COMPANIES THAT FAILED DUE TO LACK OF INNOVATION

• Blockbuster- Netflix approached Blockbuster with an offer to sell their company to Blockbuster, but the CEO rejected the proposal
• Kodak- Kodak could not innovate itself and was reluctant to adopt the changes in the digital revolution

CAPITAL BUDGETING IN PERSONAL LIFE

Capital budgeting applied in personal life can aid in taking decisions on the investments and also helps to have a control on the finance