Which metrics and methodologies are the most useful when evaluating a capital investment? Why? Our weekly 6 Lecture Notes and The

1st person to respond to

Deborah,

 In Chapter 9 of The CFO Guidebook, we are introduced to the tools of capital budgeting. Making specific reference to what you read in that chapter, respond to the following questions:

  • Which metrics and methodologies are the most useful when evaluating a capital investment? Why?

Our weekly 6 Lecture Notes and The CFO Guidebook talks about the internal Rate of Return as a calculation to determine whether the investment is worthwhile throughout the capital investment. It uses a formula that must be calculated through trials and errors.

Net Present Value: (NPV). It uses the same purpose as internal returns, Its present value tp represents the difference between the current value of money.

Profitability Index: This is a capital budgeting tool and identifies the relationship between cost, and benefits that could produce the venture successfully. When the ratio increases beyond 1.0 investment becomes more desirable to companies.

https://online.norwich.edu/academic-programs/resources/5-methods-capital-budgeting

  • How can finance leaders be more effective partners to managers and business leaders in developing capital budgets that align with the risk tolerance and mission of the organization?

This process touches upon every aspect of an organization. The capital budgeting process provides a means to bring a strategic focus to everything you do. Be honest about capital budgeting, show others in the organization, get their point of view, and ask for help regarding any missing information, that needs to be disaggregated. ( 1. CFO).

One of the first things in a communications strategy is to b a strong leader with a unique ability to effectively coordinate, and connect financial reporting governance, and communications. (https://nff.org/blog/importance-financial-leadership).

  • What can be done to make sure everyone understands the connection between the strategy and the capital budget?

There are some steps that you can take to connect the strategy and the capital budgets?

You have to understand the purposes of strategic planning and budgeting. Review the project, build a decision-making framework for all that is involved, and talk to the group about setting priorities in the workplace. 

Deborah

  1. Steven M. Bragg, CPA
  2. Week: 6 Lecture Notes
  3. https://nff.org/blog/importance-financial-leadership).

2nd person to respond to

 Csherri 

 In Chapter 9 of The CFO Guidebook, we are introduced to the tools of capital budgeting. Making specific reference to what you read in that chapter, respond to the following questions:

  • Which metrics and methodologies are the most useful when evaluating a capital investment? Why?

The metrics and methodologies most useful when evaluating a capital investment are net present value analysis and the payback method.  Net present value analysis is the traditional approach used and can be used to judge any proposal from anywhere.  NPV accounts for the decrease in the value of the dollar. The payback method is the simplest way to budget for a new asset because it decides how it will take a company to pay it off and is not based on assumptions like NPV (1).

  • How can finance leaders be more effective partners to managers and business leaders in developing capital budgets that align with the risk tolerance and mission of the organization?

Finance leaders can be more effective partners to managers and business leaders in developing capital budgets that align with the risk tolerance and mission of the organization by taking the necessary steps to ensure any proposals requested by the management team are reviewed properly reviewed to determine their worthiness of the investment. There also needs to be a method in place that ranks the priority of proposals to ensure the amount does not exceed the funds that are actually available by applying NPV (1).

  • What can be done to make sure everyone understands the connection between the strategy and the capital budget?

To make sure everyone understands the connection between the strategy and the capital budget, key objectives have to be defined, strategies and impact have to be identified, assumptions must be documented, tactics and high-level operational budgets must be developed, risks must be assessed and mitigated, and the plan checked for completeness and finalization (2).

References

  1. Steven Bragg. 2020. The CFO Guidebook
  2. https://www.trginternational.com/white-paper/6-steps-for-linking-corporate-strategy-to-the-budget/
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