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Support / Excel / Excel 2003 Help and How-to / Excel for your job / Finance
Improve your capital budgeting techniques
Applies to: Microsoft Office Excel 2003, PowerPoint 2003 By BearingPoint
Capital budgeting is a financial analysis tool that applies quantitative analysis to support strong management decisions. Using capital budgeting analysis, you can explain: l l l
The benefit impact of an investment decision over time The cost impact of an investment decision over time The risk factors associated with an investment, both immediately and in the future
And develop a financial model that accounts for all of these factors and presents the results in a usable fashion.
Capital budgeting is not just a quantitative modeling exercise, however. The goal is creating a clear and simple picture of the benefits, costs, and risks associated with a possible business investment in both the short term and the long term. The information presented in this article, plus a basic understanding of finance theory and discounted cash flow analysis techniques such as net present value (NPV), modified internal rate of return (MIRR) and investment payback can help you improve the structure, balance, and impact of your next capital budgeting analysis.
The trouble with traditional methods
The model that you use for capital budgeting must be flexible enough to paint an accurate picture of the investment. Many capital budgeting or return-on-investment (ROI) templates are not flexible enough, providing a poor basis for decision-making in some cases. For instance, the benefits, costs, and risks associated with a technology investment are different from those for a typical "hard" asset investment. Too often, the focus of decision-making based on capital budget analysis shifts toward the end results of the ROI model, and the assumptions that support those results, rather than a balanced analysis of benefits, costs, and risks. Using a recent analysis or reusing templates that are not specific to your needs might cause your analysis to be flawed, skewed, or noninclusive of important factors. The
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Improve your capital budgeting techniques - Excel - Office.com
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assumptions used might be insufficient or unsupported, which might put you in the position of defending your numbers, rather than offering information to help make a good business decision. If the project does not have a clear strategic or financial benefit, the request might be shelved for further analysis or shot down completely, leaving you and your requestor to wonder what you could have done differently.
Looking at the leading practices
When too much attention is placed on the assumptions and end results of the ROI analysis alone, the net business benefits versus the risks associated with making the investment are ignored. Restructuring your capital budgeting analysis to promote a balance between quantitative analysis and benefit versus risk analysis with an understanding of the difference between technology investments and traditional "hard" investments helps requestors and committees make better business investment decisions. Leading practices in capital budgeting consider more than just the quantifiable factors.
CONSIDER THE NATURE OF THE REQUEST
The type of benefit gained by the potential investment determines the nature of the request. There are three distinct benefit types: strategic, quantifiable, and intangible. Intangible benefits are hard to quantify, but they can have a big impact. These three benefit types form the business case, regardless of the type of investment. You should take care to highlight the primary benefit type in your analysis, because capital budgets tend to focus on quantifiable benefits. For example, a purely...
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