Ways to Improve Capital Budgeting Techniques
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Support / Excel / Excel 2003 Help and How-to / Excel for your job / Finance
Improve your capital budgeting techniques
Applies to: Microsoft Office Excel 2003, PowerPoint 2003 By BearingPoint
Capital budgeting is a financial analysis tool that applies quantitative analysis to support strong management decisions. Using capital budgeting analysis, you can explain: l l l
The benefit impact of an investment decision over time The cost impact of an investment decision over time The risk factors associated with an investment, both immediately and in the future
l
And develop a financial model that accounts for all of these factors and presents the results in a usable fashion.
Capital budgeting is not just a quantitative modeling exercise, however. The goal is creating a clear and simple picture of the benefits, costs, and risks associated with a possible business investment in both the short term and the long term. The information presented in this article, plus a basic understanding of finance theory and discounted cash flow analysis techniques such as net present value (NPV), modified internal rate of return (MIRR) and investment payback can help you improve the structure, balance, and impact of your next capital budgeting analysis.
The trouble with traditional methods
The model that you use for capital budgeting must be flexible enough to paint an accurate picture of the investment. Many capital budgeting or return-on-investment (ROI) templates are not flexible enough, providing a poor basis for decision-making in some cases. For instance, the benefits, costs, and risks associated with a technology investment are different from those for a typical "hard" asset investment. Too often, the focus of decision-making based on capital budget analysis shifts toward the end results of the ROI model, and the assumptions that support those results, rather than a balanced analysis of benefits, costs, and
Page 1 of 5
Support / Excel / Excel 2003 Help and How-to / Excel for your job / Finance
Improve your capital budgeting techniques
Applies to: Microsoft Office Excel 2003, PowerPoint 2003 By BearingPoint
Capital budgeting is a financial analysis tool that applies quantitative analysis to support strong management decisions. Using capital budgeting analysis, you can explain: l l l
The benefit impact of an investment decision over time The cost impact of an investment decision over time The risk factors associated with an investment, both immediately and in the future
l
And develop a financial model that accounts for all of these factors and presents the results in a usable fashion.
Capital budgeting is not just a quantitative modeling exercise, however. The goal is creating a clear and simple picture of the benefits, costs, and risks associated with a possible business investment in both the short term and the long term. The information presented in this article, plus a basic understanding of finance theory and discounted cash flow analysis techniques such as net present value (NPV), modified internal rate of return (MIRR) and investment payback can help you improve the structure, balance, and impact of your next capital budgeting analysis.
The trouble with traditional methods
The model that you use for capital budgeting must be flexible enough to paint an accurate picture of the investment. Many capital budgeting or return-on-investment (ROI) templates are not flexible enough, providing a poor basis for decision-making in some cases. For instance, the benefits, costs, and risks associated with a technology investment are different from those for a typical "hard" asset investment. Too often, the focus of decision-making based on capital budget analysis shifts toward the end results of the ROI model, and the assumptions that support those results, rather than a balanced analysis of benefits, costs, and