Capital Budgeting in 30 Minutes

Switching costs for capital investment are high and do-overs are expensive. A capital project is simply any use of the company’s capital resources in the present with a view toward earning a return on that investment over time, and may take the form of acquisitions, capital expenditures, research & development, or other investments. Net present value and internal rate of return are the two primary tools used to determine whether the forecasted marginal cash flows are sufficient to justify the proposed project. However, a healthy capital budgeting process goes beyond mere financial feasibility to address the proposed project’s “fit” within the overall corporate strategy. The purpose of this whitepaper is to assist directors and shareholders in evaluating proposed capital projects and contributing to capital budgeting decisions that enhance value.