Chapter 9, Capital Budget and other long-run decisions

Agree or Disagree, Why?

topic: Define capital expenditure decisions and capital budgets, and please evaluate investment opportunities using the net present value approach

This weeks topic is centered around capital expenditure which in basic terms is defined as the costs affiliated with facilities, utilities, and other fixed costs. The decision portion comes into play when an organization has to project these costs within a one year period with multiple points of consideration to take into account. These factors involve pieces of information which includes vast amounts of preset funding, high risk conditions, once these decisions are put into motion they're often unable to be reversed, and lastly when working with capital expenditures managing entities need to plan for inconsistencies in funding. The process can seem rushed and often with good reason since cash flow in a timely manner allows for investment, therefore the two variables in this scenario are cash and time. With this amount of information we can expand on organizational goals through increased output which can be made possible through initiatives such as factory refurbishments which can bring in new technology, as well as larger and more efficient machinery which by proxy can also reduce certain fixed costs such as utilities and production redundancy.

Jiamblavo, J. (2016) Managerial Accounting: binder ready version (6th ed.). Hobroken: John Wiley.

Capital budgeting is the result of the capital expenditure decisions which when surmised is the list of goals set to be achieved through the investments established well before the commitment of projects affiliated with capital budgeting. These investments can be translated to "present value techniques or time value money methods". Simple calculations can easily explain that if we invest $10 and expect a 10% return of investment at a year, we'll end up with $10*(1+.10) = $11. So what would happen if we invested $10 at 10% for 3 years? We can calculate the amount as 10*(1+.10)*(1+.10)*(1+.10) = $13.31. Lastly, Within capital budgeting we can't always expect consistent even cash flows every period, therefore the NPV(p) formula can be used: i = The firms cost of capital, t = The year the cash flow was received, and CF(0) is equal to the initial investment.In completion the formula will look as follows.= CF(0)+CF(1)/(1+i)t+CF(2)/(1+i)t