Capital Budgeting Discussion

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CAPITAL BUDGETING DISCUSSION 4

CapitalBudgeting Discussion

CapitalBudgeting Discussion

Incapital budgeting decision-making, the most important issue afinancial manager faces to focus on the cash flows rather than onaccounting net income (BiermanJr &amp Smidt, 2012). Accounting net income is a product ofaccruals that do not have sufficient information about the timing ofcash flows into and out of the company. For financial manager, thetiming of cash flows is a vital due to the effects of the time valueof money. The earlier the company gets the inflow of dollars thebetter. Thus, a financial manager uses accounting net income indifferent ways, but the time of cash inflows and outflows is the mostimportant aspect in the analysis of discounted cash flows. They haveto ensure that they spend more time in identifying the order of cashflows of an investment project.

Incorporate capital budgeting, there are several risks that are likelyto affect an investment project such as the corporate risk, themarket risk, industry-specific risk, international risk,project-specific risk, and stand-alone risk. The three main risksassociated with most projects include:

Stand-alonerisk:When the project being undertaken is considered separate from theoverall corporate asset base, the variability of returns is measuredon a single project alone.

Corporaterisk:The risk is determined based on the assumption that the project beingundertaken will affect the company’s overall asset base. The riskis therefore diversified away from project asset to other companyassets.

Marketrisk:The risk is measured based on its impact on the general stock of thecompany. It affects the overall portfolio of the company.

OnJanuary 6th2016, TheEconomist magazineposted an Inter-American Development Bank job advertisement the postof the budget division chief. One of core roles the budget divisionchief will play is the carry out capital budgeting in accordance withthe strategic goals of Inter-American Development Bank.

Reference

BiermanJr, H., &amp Smidt, S. (2012). Thecapital budgeting decision: economic analysis of investment projects.Routledge.

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