Course 3: Capital Budgeting
Prepared by: Matt H. Evans, CPA, CMA, CFM
This course provides a concise overview of capital
budgeting analysis. This course is recommended
for 2 hours of Continuing Professional Education. In
order to receive credit, you will need to pass a
multiple choice exam which is administered over the
internet at www.exinfm.com/training
A companion toll free course can be accessed by
dialing 1-877-689-4097, option 3, ID 752.
Excellence in Financial Management
The Overall Process
Whenever we make an expenditure that generates a cash flow benefit for more than one
year, this is a capital expenditure. Examples include the purchase of new equipment,
expansion of production facilities, buying another company, acquiring new technologies,
launching a research & development program, etc., etc., etc. Capital expenditures often
involve large cash outlays with major implications on the future values of the company.
Additionally, once we commit to making a capital expenditure it is sometimes difficult to back-
out. Therefore, we need to carefully analyze and evaluate proposed capital expenditures.
The Three Stages of Capital Budgeting Analysis
Capital Budgeting Analysis is a process of evaluating how we invest in capital assets; i.e.
assets that provide cash flow benefits for more than one year. We are trying to answer the
Will the future benefits of this project be large enough to justify the investment given the risk
It has been said that how we spend our money today determines what our value will be
tomorrow. Therefore, we will focus much of our attention on present values so that we can
understand how expenditures today influence values in the future. A very popular approach
to looking at present values of projects is discounted cash flows or DCF. However, we will
learn that this approach is too narrow for properly evaluating a project. We will include three
stages within Capital Budgeting Analysis:
! Decision Analysis for Knowledge Building