How Abc Was Used In Capital Budgeting Summary

Believe it or not there are companies out there that make $50 million dollar mistakes. “How ABC Was Used in Capital Budgeting” examines how one Fortune 500 company almost made what could have been an extremely devastating $50 million dollar mistake by carrying out a “cybermall” project based on favorable business case forecast results. Luckily, upper management was willing to allow their Chief Financial Officer to conduct further analysis before making this investment decision.

This article examines an industry leader that, in the 1990s, was looking for the next big business opportunity in the electronic market place. With nothing else out there like a “cybermall” bringing buyers and sellers together in the comfort of any television marketplace, senior management believed their “speed to market” with this project would really give them an edge.
The ABC model forecasts a 10% decrease in total revenues, 20% increase in capital expenditures, and 20% decrease in net cash flows versus the business case forecast; depending on the cost of capital, with the ABC forecast, there are some very low to unfavorable NPVs possible. The ABC analysis confidently modeled initial revenues were going to be too low to support the higher than anticipated start-up costs; additionally, operating leverage didn’t become probably until around halfway through the project, which was simply too risky. Based on this information, various other key operating statistics, and multiple pro forma financial statements, the management team had the information they needed to make a final, educated decision as to go forward with this project or not; the ultimate decision was to reject this project and to focus efforts in business opportunities other than the