Question

Capital budgeting decisions depend on a variety of considerations such as availability of funds, the relationship among projects, and the risk associated with a particular project.

• What would you consider the most challenging or difficult aspect of the capital expenditure process and why (for example, when the company embarks on changing its current accounting information systems to an ERP system)?

Answer 1

We know that the planning, budgeting, and forecasting processes are already considered as some of the most neglected and underserved management procedures and when it comes to suitable systems support. So it should come as no surprise that the planning and approval of Capital Expenditure (CAPEX), a more specialized aspect of budgeting generally receives even less attention.

With many corporate balance sheets flush with cash, choosing which investments to make is obviously a critical task for CFOs. And amid continued economic uncertainty, many wonder what will make the difference between capital expenditure (capex) programs that deliver value and competitive advantage, and those that don’t.

Universally acknowledged by management of all levels as a problem area, it is dogged by lengthy timescales, cumbersome approval procedures and inaccurate data, causing many to question the value of a process which absorbs so much management time.

There are basic 3 stages within Capital Budgeting:

I Decision Analysis for Knowledge Building

II Option Pricing to Establish Position

III DCF technique for making the Investment Decision

In my opinion I considered as following aspect of capital expenditure process consider the most challenging or difficult aspect

Option Pricing to Establish Position that is second step of Capital budget analysis. It includes the following

1. Payback period.

Most of the time, it becomes difficult to decide that for how many years the project is generating income and for how much time it is going to beneficial to us. Because the situation will be very according to the change in the economy environment.

2. Timing Options:

Some time it is very difficult to decide whether to delay our investment in the project.

3. Abandonment Options:

The ability to abandon or get out of a project that has gone bad.

4. Growth Options:

The ability of a project to provide long-term growth despite negative values. For example, a new research program may appear negative, but it might lead to new product innovations and market growth. We need to consider the growth options of project