Background:

Capital budgeting, the process of analyzing investment opportunities to determine which to accept, constitutes a core activity of every for-profit or non-profit organization. A decision to allocate capital to a project implies that the firm has chosen not to engage in an alternative project or investment. All budgeting decisions are associated with an opportunity cost, in other words. Most projects are relatively irreversible and have long-term consequences for the firm. Decision rules have been developed to ensure that mangers focus on increasing shareholder value, and required readings for this module consider a range of decisions rules and forecasting tools used in the capital budgeting process.

Whether we understand firm's capital budgeting as supporting shareholder value (in a for-profit firm), or the organization's mission (in a non-profit firm), it is at the center of an organization's ability to achieve operational goals.

Give its economic and financial importance to the firm, it is not surprising to find that firms across the globe evaluate these decisions using similar tools. Firms nevertheless tend to apply these with varying fidelity.

In this discussion, you are asked to consider the application of technical tools described in this module, and their limitations, including how and why firms build security into their decision-making process. Investors watch corporate earnings reports in anticipation, and with anxiety. These reports, and the way that results differ from earnings forecasts, can have short and long-term effects on shareholder value, and on the operation of the firm more generally.

Discussion Prompt:

In this prompt, utilize assigned readings to present to peers formally, summarizing the practical and market-driven implications of earnings estimates that result from managers' application of decision rules, forecasting techniques, and additional analyses to reduce risk and justify earnings estimates and, ultimately, capital budgeting decisions. Assume that you and your peers form a single management team, however, given that you vary in your familiarity with these issues, it is to the benefit of yourselves and the firm to increase understanding in these areas.

Tasks:

2. Explain:
   1. Decision rules used alongside NPV to assess investment projects, considering their logic, application, and complementary nature;
   2. Elements of capital budgeting which might differ for non-profit firm;
   3. Risk-mitigation procedures;
   4. Consequences of uncertainty, including:
      1. External, Market-driven consequences
      2. Internal Financial or Operational Consequences
3. Considering their responses to (1) provide two posts containing substantive, constructive, and critical input to peers

Answer rating: 100% (QA)

Explanation 1 Decision rules used alongside NPV to assess investment projects Decision rules such as the internal rate of return IRR and payback period are commonly used alongside net present value NP... View the full answer