February 2007
Intermediate to advanced
456 pages
15h 57m
English
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Chapter 10. Capital Budgeting[*]
One of the most common financial analysis tasks with which a CFO is confronted is evaluating capital investments. In some industries, the amount of money poured into capital improvements is a very substantial proportion of sales, and so is worthy of a great deal of analysis to ensure that a company is investing its cash wisely in internal improvements. In this section, we review the concept of the hurdle rate, as well as the three most common approaches for evaluating capital investments. We also discuss problems with the capital budget approval process and cash flow modeling issues, and then finish with reviews of the capital investment proposal form and the post-completion project analysis, which brings to a close the complete cycle of evaluating a capital project over the entire course of its acquisition, installation, and operation.
Hurdle Rate
When a CFO is given a capital investment proposal form to review, he or she needs some basis on which to conduct the evaluation. What makes a good capital investment? Is it the project with the largest net cash flow, or the one that uses the least capital, or some other standard of measure?
The standard criterion for investment is the hurdle rate. This is the discounting rate at which all of a company’s investments must exhibit a positive cash flow. It is called a hurdle rate because the summary of all cash flows must exceed, or hurdle, this rate, or else the underlying investments will not be approved. The ...
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O’Reilly covers everything we've got, with content to help us build a world-class technology community, upgrade the capabilities and competencies of our teams, and improve overall team performance as well as their engagement.Julian F.
I wanted to learn C and C++, but it didn't click for me until I picked up an O'Reilly book. When I went on the O’Reilly platform, I was astonished to find all the books there, plus live events and sandboxes so you could play around with the technology.Addison B.
I’ve been on the O’Reilly platform for more than eight years. I use a couple of learning platforms, but I'm on O'Reilly more than anybody else. When you're there, you start learning. I'm never disappointed.Amir M.
I'm always learning. So when I got on to O'Reilly, I was like a kid in a candy store. There are playlists. There are answers. There's on-demand training. It's worth its weight in gold, in terms of what it allows me to do.