BUS 650: Managerial Finance
Critically reflect on the importance of capital budgeting. Why is this such a heated subject in many boardrooms? How does capital budgeting promote the financial health of an organization? How will you use the financial techniques you have learned this week to promote the financial health of your organization?
Capital budgeting is defined as the process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. In the video, capital budgeting was described using Present value analysis. PVA or present value analysis is defined as a future amount of money that has been discounted to reflect its current value, as if it existed today. The present value is always less than or equal to the future value because money has interest-earning potential, a characteristic referred to as the time value of money. The example that the video provided, the one with purchasing a car at present value today for $10,000 dollars cash versus buying a car for that price and spreading it out throughout five years.
The heated subject in many boardrooms may lie within the company’s sales, marketing and HR department. I think the constant need to improve the business is the argument in many boardrooms. Capital budgeting helps support the financial health of an organization by laying ground rules. You know how much your company can afford to spend in different areas, sticking to a budget is important even if the company needs to expand. In reality, there is a cap on how much you can spend on certain upgrades for your business. Recognizing that and sticking to the budget closely, will ensure that your business remains prosperous.
This week I learned a lot more about present values and their ability to reflect on the past and the future. I learned that if I want to buy my dream house in the next 3 years, I will need to start researching the values of homes today around...