Please reply to my classmate’s post below- original assignment below:
Part A
Capital investments are long-term expenditures that are intended to create future profit opportunities for the company. In making capital investment decisions firms have several things to consider. First, financial managers must evaluate the potential of the project by assessing its expected cash flow by calculating the net present value (NPV) and its profitability by calculating the internal rate of return (IRR) (Block, 2022). Both of these calculations take into consideration the time value of money and compare the future earnings and profitability, respectively, to the cost of capital to invest in the project (Pinkasovitch, 2023).
Since capital investments are larger in nature and span at least a year, and often much longer, there is more uncertainty and more risk in these investments (Pinkasovitch, 2023). Investments with higher risks may offer the potential for higher returns but must be considered within the firm’s current context and overall strategy. Risk can come in the form of market changes, outside competition, and regulatory factors. With these external risk factors, companies must carefully consider whether the size of the project will impact its liquidity, ability to meet its financial obligations, and overall operations.
One pitfall in capital budgeting is that analysis, including NPV, tend to focus more on the creation of an opportunity and does not adequately consider the benefit of not creating an opportunity (Dixit & Pindyck, 1995). Having options and flexibility can be as or more valuable than the cash flow created by a new investment. In not taking action, there also lies the probability of avoiding losses if market or regulatory risks change negatively for the firm. The best decisions are ones that can balance creating options and preserving the ability to take advantage of yet-to-be-determined options as well.
Part B
Capital budgeting in the nonprofit space can use many of the same tools to analyze the viability of an investment project for an organization. One of the most common capital investments for an organization involves facilities, whether it is planning deferred maintenance or breaking ground on a new facility (Chi, 2024). Organizations may also consider whether to launch a new initiative or begin serving a new client population. Capital investment due diligence, analysis, and decision-making is a valuable tool for a nonprofit’s organizational advancement; the process can help nonprofits determine whether investments will further their mission and better help them serve their community. Capital budgeting also helps organizations define their metrics to stakeholders and holds them accountable regarding financial viability.
References
Block, S. (2022). Foundations of Financial Management (18th ed.). McGraw-Hill Higher Education (US).
Chi, H. (2024, February 21). Council Post: Strategic Dollars: Navigating Success Through Capital Expense Budgeting. Forbes. https://www.forbes.com/sites/forbesnonprofitcouncil/2024/02/21/strategic-dollars-navigating-success-through-capital-expense-budgeting/?sh=348e9c7f5529
Dixit, A., & Pindyck, R. (1995, May). The Options Approach to Capital Investment. Harvard Business Review. https://hbr.org/1995/05/the-options-approach-to-capital-investment
Pinkasovitch, A. (2023, October 30). An Introduction to Capital Budgeting. Investopedia. https://www.investopedia.com/articles/financial-theory/11/corporate-project-valuation-methods.asp
Original Assignment: Capital budgeting is the process of evaluating and selecting long-term investment projects that can generate positive net present value (NPV) and contribute to a firm’s strategic objectives.
Part A: Conduct additional research (using the NLU library) and respond to the following discussion prompts. In your answer be sure to draw on your research and all relevant readings and videos in this week’s materials. Also, be sure to provide examples to support your answers.
What are some of the factors that firms should consider when making capital budgeting decisions, such as project size, risk, cash flow, timing, and financing options? How do these factors affect the profitability, risk, and flexibility of a firm’s investment portfolio?
How do firms incorporate strategic considerations into their capital budgeting decisions, such as competitive position, market growth, technological innovation, and sustainability? How do firms align their investment projects with their overall corporate strategy and goals, and how do they balance short-term and long-term priorities?
What are some of the challenges and pitfalls of capital budgeting, such as estimation errors, behavioral biases, capital rationing, and project interdependence? How do firms mitigate these challenges and ensure that their investment decisions are sound and aligned with their financial and non-financial objectives?
How do firms monitor and evaluate the performance of their investment projects, and what are some of the metrics and benchmarks they use, such as return on investment (ROI), net cash flow, and hurdle rate? How do firms adjust their capital budgeting decisions over time based on the actual performance and feedback from their projects?
Part B: While capital budgeting is often associated with for-profit firms, non-profit organizations also need to make long-term investment decisions that can support their mission and enhance their impact.
What are some of the types of investment projects that non-profit organizations might consider?
How do non-profit organizations evaluate these investments and how do they prioritize them?
Non-profit organizations also need to consider the sources of financing for their investment.
