Essence of capital budgeting

Capital budgeting not only involves crucial decisions about the dollar amount budgeted, the source and cost of financing, but capital budgeting decisions also cement the direction and future of the company for many years to come by determining what projects the money is invested in. This is especially important for technology companies that make large bets on a particular new product and technology that will impact the financial future of the company.

 

 

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After reading the chapter, I want you to look at some big technology names such as Apple, Microsoft and Cisco Systems. I want you to attempt to create a link between these companies capital budgeting and capital expenditure decisions over the years and what products they invested in, and what consequences they experienced due to those decisions. You can simply determine the Company’s capital budgeting decisions, the sources and the associated cost, and how that money was invested by looking at its financial statements, popular press, or what you already know about the Company.  For example, does anyone remember Flip camera? This was a company that Cisco acquired for close to $500 million. After few years, the company shut down Flip as every new phone would have a high quality camera. This is an example of a very bad capital budgeting and capital expenditure decision. At some point, Cisco’s management decided to raise $500MM, either internally or externally, and where to invest in for whatever reason. This action destroyed $500MM in value, clear and simple. On the other hand, at some point in Apple labs the company choose to direct time, resources and capital towards a project called “Purple”, which created the first iPhone and cemented Apple’s legacy as one of the most valuable companies in the world by deciding to direct capital budgeting dollars towards a mega block buster product. 

I encourage that you to bring up other company names for discussion, where you can intelligently apply the overview of capital budgeting decisions from chapter 10 to that particular company’s capital budgeting decisions. Does Amazon’s big bet on cloud technology and the enormous financial capital invested justify the risks? What direction of capital budgeting has Apple taken versus a Google that has bet heavily on Android? How about Tesla, Oracle, or billions of dollars automakers such as GM and Ford are directing towards electric and self-driving technology? Look at Capital Budgeting as a business and operating decision across many industries. Also, take the time to look at the above companies’ cash flow statements, under the investing cash flow section to see how much of their cash goes toward capital expenditures, or capex. What other examples can you think about where the company’s cash flow has been invested wisely or unwisely for the purpose of the next big thing? 

 

 

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In summary, take a good look at multiple companies’ cash flow statement, see the trends in cash invested in capital budgeting decisions, and link those trends to actual investments these companies have made and discuss the rational, success and failures of those companies.