Question

In this module, we are studying capital budgeting as a tool to determine whether a long-term asset should be purchased. The process we follow could be used in other applications, such as the following:

Mergers and acquisitions of companies,

Decisions to expand or downsize a business,

Decision to change jobs,

Decision to take online courses,

or Pricing a product.

In this weeks discussion board, explain specifically how the capital budgeting tool could be modified to be used in one of these applications—or in a completely different application you identify. Feel free to use an example you have experienced in your career.

Answer 1

The capital budgeting is a method in which the expenditure and investment of a company are evaluated and the profitability is judged so that the decision regarding the acceptability of the project can be taken. The process is estimating the cash outflow, identifying the project life and the cash inflows. The concept of time value of money has to be applied on the cash inflows and then the outflow and inflow has to be compared to get the profitability of the project.

This same process can be applied for the expansion or downsizing of a business. The business will first have to estimate the amount of money that it will have to spend. Then the inflows from expansion or downsizing of the firm has to be calculated. The present value of the cash inflows has to be listed and then the profitability of the firm has to be calculated. This will help to identify whether it is profitable to expand or downsize the business.