Introduction
Capital budgeting can be described as the process where corporations make investment decisions based on those that might create value to the firm. It involves the identification of the long-term capital investments in a particular period, based on the potential for improving business value (Shapiro, 2005). The decision to invest is informed by the identification of an issue or an opportunity, after which an evaluation is conducted to determine whether the company has the capacity to make the investment. It is important for the leadership of a firm to understand the process, as capital investment projects constitute the most essential financial investments that a company can make. Since the projects usually involve a huge amount of money, it is important for leaders to be aware of the process, as making poor capital investment decision can affect the growth of business negatively.
An Explanation and Description of How Companies Use Capital Budgeting To Their Advantage
For the leadership of an organization to make long-term investment decisions, it has to use the capital budgeting process to understand the risks and the opportunities presented, including the way in which the risks can affect the company’s returns (Shapiro, 2005). Companies can use the process to determine their net present value, which is used for calculating the difference between the costs of implementing a particular project and the cash flow that the project is expected to generate (Brigham & Houston, 2013). Through calculating the net present value, firms can compare the amount of investment made at the beginning of a project, to the current value of the cash that the investment is expected to generate in future. Companies can use the capital budgeting process to derive the net present value, which can be used to the organization’s advantage, as the measure can be used to determine whether an investment will increase the value of the organization.
Delegate your assignment to our experts and they will do the rest.
Since capital budgeting uses a number of calculations to determine the most valuable investments, firms can create a structured process that can be used to evaluate investment opportunities (Brigham & Houston, 2013). For this reason, the company will be in a position of developing long-term goals, control its capital expenditures, as well as estimate the future cash flows. In relation to the costs of implementing a new project, the capital budgeting process will enable an organization to determine the amount of money needed. In this regard, calculations account for the initial amount of investment and any other ongoing costs that can sustain the investment. Once the capital budgeting approaches are in place, the decision-making process in the company can be streamlined, which is an indication that the company can save time and money.
How Boeing Used Capital Budgeting Within Its Industry to Advance Business
After identifying an opportunity presented by developing a plane that would improve the fuel economy, Boeing decided to implement the Dreamliner project. Through the capital budgeting process, the company projected the net present value of the implementation process, consequently determining that the project would add value to its investors. In this regard, the capital budgeting process revealed that the implementation of the Dreamliner project would present a positive net present value. The process also involved the assessment of the opportunity cost, meaning that it had to build a high cost, but a fuel-efficient plane, indicating that they had to abandon the manufacturing of low-cost planes that were not as fuel-efficient as the high-cost planes. The capital budgeting process also involved an assessment of the effects of delays to the net present value. In this light, an assessment of the sunk costs provided the company with the opportunity to decide on whether to continue with the project, based on investments made on the research and development process. From the onset of the research and development process to the implementation of the project, Boeing tried to do it in five years, a period that typically takes seven years.
How Coca Cola Company Used Capital Budgeting Process to Advance Business Opportunity
The Coca Cola Company is one of the other entities that have used the capital budgeting process to advance business opportunities. Even though controlling expenses are important for the company, its capital expenditure budget is considered as the most important, as it is based on the development of different ways through which it can acquire revenue through new product developments and improvement of new products and projects (Lussier, 2008). The developments are fundamental to increasing the value of investment, including the creation of customer value. The Coca Cola Company relies on its research and development efforts to identify different products that might require investment (Lussier, 2008). For those selected for production, the company uses the capital budgeting process to identify the internal rate of return, including the net present value of its production. The outcome of the deliverables from the process is used to determine whether the company will invest in the product, based on the expected value to be derived from production.
Conclusion
The assessment reveals that the capital budgeting process is fundamental to guiding investments decisions that can be used by an organization to make valuable investments. In this regard, the process enables decision-makers in an organization to identify investment opportunities, understand the risks, and ascertain the value that could be derived from an investment decision. However, an important factor to account for is the idea that capital budgeting is primarily vital for long-term investment opportunities.
References
Brigham, E. F., & Houston, J. F. (2013). Fundamentals of financial management . Mason, Ohio: South-Western Cengage Learning.
Lussier, R. N. (2008). Management fundamentals: Concepts, applications, skill development . Mason, OH: South-Western/Cengage Learning.
Shapiro, A. C. (2005). Capital budgeting and investment analysis . Upper Saddle River, NJ: Pearson Education.
