Capital Budgeting – Coursework Example
Capital Budgeting Capital budgeting involves various steps used in decision making regarding on capital projects within organisations. The capital budgeting process includes identification of opportunities (brainstorming), project analysis, project planning and project monitoring (Varshney and Maheshwari, 2010). Academic knowledge might differ from the decisions of a financial manager in several ways. First, the investment opportunities identified for the purpose of developing an academic knowledge may not be similar to the opportunities encountered in the real world. Real chief financial officers identify investment opportunities based on real situation in the market. For example, the rise of middle income earners in China can become an important investment opportunity for Smartphone manufacturers. However, academic knowledge might not identify such opportunities.
In terms of data needed, academic knowledge utilizes secondary data such as company websites, online journals and articles, and annual company reports (Varshney and Maheshwari, 2010). In the real world, chief financial officers gather data directly from primary sources such as customers and suppliers. This data can provide more objective conclusions. Decision making for academic knowledge also differs from that for real chief financial officers. Academic knowledge is based on theories which may not provide practical solutions or decisions. On the other hand, real financial officers appraise real projects and make objective and practical decisions. More or less costs may be incurred compared to those estimated by academic knowledge.
Project monitoring is explained in academic knowledge as a way of comparing planned with actual results, and explaining the difference. Academic knowledge just provides a guide, but the real chief financial officers monitor real projects. This may result in errors such as overestimations or underestimations.
Some of the popular methods of capital budgeting includes Net present value (NPV), Payback period, Internal Rate of Return (IRR) and Weighted Average Cost of Capital (WACC). Net present value in academic knowledge is different from reality because the value of a project in reality may differ from the estimates of academic knowledge. Furthermore, academic knowledge suggests that payback period is the time that a project takes to give the initial cash outlay of the project. Real chief financial officers may consider a project that provides profits immediately in order to win the trust of their clients.
Varshney, R.L. and Maheshwari, K.L. (2010). Manegerial Economics. New Delhi: Sultan Chand & Sons.