Capital budgeting is the allocation of funds to long-lived capital projects. A capital project is a long-term investment in tangible assets. Chapter 2 describe the capital budgeting process, including the typical steps of the process, and distinguish among the various categories of capital projects. | Chapter 2 Capital Budgeting Presenter’s name Presenter’s title dd Month yyyy 1 1. Introduction Capital budgeting is the allocation of funds to long-lived capital projects. A capital project is a long-term investment in tangible assets. The principles and tools of capital budgeting are applied in many different aspects of a business entity’s decision making and in security valuation and portfolio management. A company’s capital budgeting process and prowess are important in valuing a company. Copyright © 2013 CFA Institute 2 LOS: Describe the capital budgeting process, including the typical steps of the process, and distinguish among the various categories of capital projects. Page 48 1. Introduction The word “capital” implies long term. Capital funds are long-term sources of funds (notes, bonds, and stocks). Capital budgeting is investing in long-lived assets. Working capital are the funds necessary to support the operation of the long-lived assets. 2 2. The capital budgeting process Copyright © 2013 CFA Institute 3 LOS: Describe the capital budgeting process, including the typical steps of the process, and distinguish among the various categories of capital projects. Page 49 2. The Capital Budgeting Process The capital budgeting process requires analyzing many ideas and identifying the profitable projects that fit with the company’s strategy. 3 Classifying projects Copyright © 2013 CFA Institute 4 LOS: Describe the capital budgeting process, including the typical steps of the process, and distinguish among the various categories of capital projects. Pages 49–50 Classifying Projects Replacement projects: Existing assets are replaced with similar assets. Example: A manufacturing company replacing equipment on an assembly line Expansion projects: Increase the size of the business. Example: Wal-Mart opening a new retail outlet New products and services: These create greater uncertainties; hence, more attention may be required in the analysis of these projects. . | Chapter 2 Capital Budgeting Presenter’s name Presenter’s title dd Month yyyy 1 1. Introduction Capital budgeting is the allocation of funds to long-lived capital projects. A capital project is a long-term investment in tangible assets. The principles and tools of capital budgeting are applied in many different aspects of a business entity’s decision making and in security valuation and portfolio management. A company’s capital budgeting process and prowess are important in valuing a company. Copyright © 2013 CFA Institute 2 LOS: Describe the capital budgeting process, including the typical steps of the process, and distinguish among the various categories of capital projects. Page 48 1. Introduction The word “capital” implies long term. Capital funds are long-term sources of funds (notes, bonds, and stocks). Capital budgeting is investing in long-lived assets. Working capital are the funds necessary to support the operation of the long-lived assets. 2 2. The capital budgeting process
