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Handbook of Budgeting, 6th Edition by William R. Lalli

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CHAPTER TWENTY-FIVE

Capital Investment Review: Toward a New Process

Bryan Crawford

Bonneville Power Administration

INTRODUCTION

A well-managed enterprise has a strong alignment between its core mission and daily operations. Unless key strategic business objectives permeate the managerial decisions at every level, the firm will not thrive. Few managerial decisions are more important for the long-term viability of a firm than the selection and management of physical assets. In many ways, the choice of which investments to make, as outlined in the investment strategy, is the clearest embodiment of the firm’s overall strategy. This is especially true in an industry as capital intensive as the electric power industry.

Although private-sector firms may be in very different businesses, they share the common purpose of increasing shareholder value. Successful private-sector firms have adopted capital strategies that seek the best return on their assets consistent with their overall business direction. This return on assets is measured by cash flows. New capital investment, disinvestment, and divestiture opportunities are selected based on their ability to add to the net present value of cash flows on the asset base.

The Bonneville Power Administration (BPA) is one of four Federal Power Marketing Administrations. Bonneville, headquartered in Portland, Oregon, transmits and markets the power from the Bureau of Reclamation and U.S. Army Corps of Engineers hydroelectric projects located in ...

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