Capital Budgeting

One of the most important decisions that must be taken when selecting from a range of projects is which method(s) of Capital Budgeting a company will opt for in order to arrive at the final proposed solution. “Investment decisions must be consistent with the objectives of the particular business. For a private sector business, maximising the wealth of the owners (shareholders) is usually assumed to be the key financial objective.” (Atrill and McLaney, 2009, p. 259) As a company exists primarily to increase the wealth of the stakeholders it should only invest capital to implement a project when the outcome will result in benefits that exceed the cost of the investment. Appraisals need to be carried out in order to select the project which provides the best return on that investment. Capital Budgeting is the process of appraising these projects in order to select the project most suited to the company‟s strategy. The purpose of this report is to discuss four methods of appraisal (Payback Period, Accounting Rate of Return, Net Present Value and Internal Rate of Return). A case study describes each of these appraisal processes when applied to the requirement to purchase one printing press, to be selected from two qualifying contenders. This is achieved through an in-depth appraisal analysis coupled with a review of sensitivity analysis, in turn followed by an assessment of installation risks that could adversely affect the appraisal process.

“Budgeting and cost management is the estimating of costs and the setting of an agreed budget, and the management of actual and forecast costs against the budget.” The Association for Project Management Book of Knowledge (APMBoK, 2006)

Companies initiate projects that are in line with the defined strategy of their organisation and which are intended to add value to the organisation. Any organisation that embarks on such a project (or portfolio of projects) must scrutinise each potential project to ensure that the cost of...