Скачать с ютуб Capital budgeting: how it works in the real world в хорошем качестве

Capital budgeting: how it works in the real world

Have you ever wondered how to apply capital budgeting techniques in the real world? In a textbook, the way you learn about capital budgeting techniques is very outcome-oriented. In a real world business operation, capital budgeting is much more practical, and constraints-oriented. Let me show you what I mean by that, and share some of the insights from working with capital-intensive businesses. ⏱️TIMESTAMPS⏱️ 00:00 How to apply capital budgeting techniques 01:31 Setting the CapEx budget 02:29 Productivity projects vs growth projects 04:44 Timing of CapEx projects #capitalbudgeting techniques help rank investment project opportunities. We have six projects to choose from in this example. If you rank the projects based on the payback method, then you start with the project that claims to have the shortest payback period (which is the most attractive), and end with the project that has the longest payback period (which is the least attractive). If you rank the projects based on the net present value method, which takes the time value of money into account, then you start with the project that creates the highest amount of value (which is the most attractive), and end with the project that creates the lowest amount of value (which is the least attractive). If you rank the projects based on internal rate of return, then you start with the project that promises the highest percentage return (which is the most attractive), and end with the project that promises the lowest percentage return (which is the least attractive). Where do we go from here? Which is better: a shorter payback period, a higher NPV, or a higher IRR? Well… it depends! First: how much investment budget is being requested, and how much CapEx budget is available? The six projects in our example add up to a requested $130 million. The CapEx budget that the company makes available for the current year is $100 million. This is actually a good thing! It’s nice to have more projects available than what you can fund. So how does a company come up with $100 million CapEx budget for the year? I have seen companies relate their CapEx budget to their expected revenue: $100 million could be 5% of $2 billion in revenue. Others might relate CapEx to Free Cash Flow. If the expected Cash From Operating Activities is $300 million, and the target Free Cash Flow for the year is $200 million, then as a result there is $100 million available for capital expenditures. On top of that, company leadership might specify that the #CapEx budget has to be split 50/50 between productivity projects and growth projects. Productivity as in cost savings, primarily to increase the gross margin percentage. Growth projects as in revenue growth, as the stock market places a huge premium on high growth versus low growth companies. The first three projects on our list are productivity projects. A lot of companies rank these based on the payback method with a “cut-off”, for example selecting the most attractive projects as long as they have a payback within 3 years. Why would you use the payback method for productivity projects? It’s because most productivity projects have the same “format”: in return for an upfront investment of $X, we expect $Y of annual savings. Investing to automate a part of the production process, in return for a headcount reduction, for example. Benefits tend to be the same for each year in the project scope. Simply divide X by Y and you have the expected payback period. The other three projects on our list are growth projects. These tend to be evaluated on NPV and IRR, as project benefits are likely to grow over time, and timing becomes very important. The payback method wouldn’t do them justice. Net Present Value and Internal Rate of Return often point you in the same direction, in terms of ranking projects from most attractive to least attractive. The ranking for our growth projects is N, P and then O. However, that doesn’t resolve our problem of having $50 million available for $60 million worth of growth projects! That’s where the very practical aspect of timing comes in. Each CapEx project has an engineering phase, and a construction phase. Let’s assume for the projects in our list that all of the actual spending happens in the construction phase. Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In! Want to get access to bonus content, and/or express your gratitude by buying me a cup of tea? Join my channel as a member through    / @thefinancestoryteller