INVESTMENT ANALYSIS ESSENTIALS OF FINANCIAL ANALYSIS Sources of Funding for Capital Expenditures The Time Value of Money Discounted Cash Flow and Interest Calculations INVESTMENT DECISIONS Allocation of Capital Funds 2143 2143 2144 2144 2148 2148 Classification of Alternatives Analysis Period | CHAPTER 71 INVESTMENT ANALYSIS Byron W. Jones Kansas State University Manhattan Kansas ESSENTIALS OF FINANCIAL Classification of ANALYSIS Sources of Funding for Capital Expenditures 2143 2143 Alternatives Analysis Period 2149 2151 The Time Value of Money Discounted Cash Flow and Interest Calculations 2144 2144 EVALUATION METHODS Establishing Cash Flows Present Worth Annual Cash Flow 2152 2152 2154 2155 INVESTMENT DECISIONS Allocation of Capital Funds 2148 2148 Rate of Return Benefit Cost Ratio Payback Period 2155 2157 2157 ESSENTIALS OF FINANCIAL ANALYSIS Sources of Funding for Capital Expenditures Engineering projects typically require the expenditure of funds for implementation and in return provide a savings or increased income to the firm. In this sense an engineering project is an investment for the firm and must be analyzed as an investment. This is true whether the project is a major new plant a minor modification of some existing equipment or anything in between. The extent of the analysis of course must be commensurate with the financial importance of the project. Financial analysis of an investment has two parts funding of the investment and evaluation of the economics of the investment. Except for very large projects such as a major plant expansion or addition these two aspects can be analyzed independently. All projects generally draw from a common pool of capital funds rather than each project being financed separately. The engineering function may require an in-depth evaluation of the economics of a project while the financing aspect generally is not dealt with in detail if at all. The primary reason for being concerned with the funding of projects is that the economic evaluation often requires at least an awareness if not an understanding of this function. The funds used for capital expenditures come from two sources debt .
