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Capital Budgeting Process: allocation of value, key factors, financial return

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1. Discuss how an organization would determine the total value to be allocated towards capital projects.

2. Discuss the key factors that would determine if a project should be approved in a capital budgeting process.

3. After a capital project has been approved and completed, discuss how you would assess whether or not the project had the desired financial return.

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Solution Summary

The following problem discusses capital budgeting processes. Concepts discussed include allocation of value, key factors and financial return.

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Discuss how an organization would determine the total value to be allocated towards capital projects.

Following is the process

a. The organization will consider the list of capital projects available.
b. The amount required for purchase of equipment, land and building required for the projects should be considered.
c. The installation charges required for installation of machinery, shipping charges to be incurred, architect' fees, engineers' fees, freight charges and any other expenses towards purchase of machinery should be capitalized.
d. Amount of sale proceeds of old machinery if any should be deducted.
e. The additional working capital required for all the capital projects will be considered.
f. Any expenses incurred towards market survey expenses like surveyor's fees.
g. Any additional hiring fees (recruitment expenses) and training expenses incurred towards the recruiting the new employees to work on the job or the training expenses incurred towards the training of existing employees for undertaking new capital projects should be included.
h. Provision with regard to inflation should be included in the total value.
i. Further provision can be added towards unexpected ...

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