The Capital Budgeting Process

Capital Budgeting and the Strategic Triangle 1 Purpose of this Module 2 Strategic Context of Capital Budgeting 2 Steps in the Capital Budgeting Process 3 Illustration of Steps in Capital Budgeting 4 Step 1: Translate Strategy into Capital Needs 5 Step 2: Generate Alternatives 5 Step 3: project Financial Results 6 Acquisition-Related Cash Flow 6 Annual Operating Cash Flow 7 Adjusting Cash Flows for Income Taxes 11 Adjusting Cash Flows for Price Changes 11 Step 4: Perform Financial Analysis 12 Discounted Cash Flow Methods 12 Net Present Value Method 13 Internal Rate of Return Method 15 Partial Cash Flow Model - The Payback Method 17 Accounting Rate of Return 18 Step 5: Analyze Risk 19 Step 6: Consider Nonfinancial Factors Step 7: Select Project Authorization to Spend 21 Step 8: Do Postapproval Reviews 21 Technical Attributions 22 Behavioral Attributions 23 Cultural Attributions 24 Lessons Learned 25 Appendix A: Mathematics of Discounted Cash Flows 26 Computing Future and Present Values of Single Sums 26 Analysis of Annuities 27 Appendix B1: Single Sum Table 29 Appendix B2: Ordinary Annuity Table 30 Common Terms 31 Problems and Cases 33 Case 1: Club Line 43