Capital Budgeting

Several factors make investment decisions using capital budgeting one of the most important functions financial managers are involved with: 

• Capital used to fund investment projects is limited, and must be carefully allocated across the entire business. 
• Investments require the use of large amounts of cash, limiting future financial flexibility. 
• If a firm invests too much into a capital project, it could have high depreciation on an asset with limited value. 
• If a firm invests too little into a capital project, it may have limited capacity, putting it at a disadvantage versus competitors. 
• Timing is important, ideally investment projects are completed close to when they are needed. 

This course provides an overview of the concepts of capital budgeting for investment decision making from the perspective of a finance and accounting organization, emphasizing the integration of cash flows, net present value analysis, risk assessment and risk management.

The course starts with an overview of the capital budgeting process and then reviews the analysis of cash flows during the development, operating and end of project phases.

This course covers the “Investment Decisions” material covered in the Certified Management Accountant (CMA) Part 2 examination.

Topics include: 

• Capital Budgeting Process
• Cash Flow Analysis
• Payback and Discounted Payback
• Net Present Value (NPV) and Internal Rate of Return (IRR)
• Risk Analysis in Capital Budgeting
• Evaluating and Ranking Capital Projects
• Risk Mitigation Using Real Options 

Course Key Concepts: Cash Flows, capital budgeting, capital rationing, discount rate, discounted payback method, explicit costs, implicit costs, independent projects, internal rate of return (IRR), Monte Carlo simulation, mutually exclusive projects. net present value (NPV), operating cash flow, opportunity costs, payback method, real options, salvage of existing investment, sensitivity analysis, sunk cost, tax shield