Question

Explain and describe how companies use capital budgeting to their advantage                       

Describes how Boeing used capital budgeting within its industry to advance business

describe how another company used capital budgeting to advance business opportunity

Answer 1

Capital budgeting

The process through which a business organisation may determine and evaluate the large investment and expenses is termed as Capital Budgeting. Capital budgeting decisions of a company are related to projects that require larger investments, are of a greater scale and give returns over multiple subsequent years. Some examples include the acquisition of a new firm or building of a completely new plant. Capital budgeting analysis reveals whether equity, debt or retained earnings should be used for funding the cash for the project. Among other desirables, increasing the value of the company in the market and for the shareholders is one of the primary aims of capital budgeting. Capital budgeting analysis may involve net present value, throughput analysis, discounted cash flow, payback period and internal rate of return calculation and analysis methods.

How do companies use capital budgeting to their advantage

Capital budgeting and the methods of it help companies know the future returns of an investment. The process provides them advantages including:

1. Capital budgeting helps companies understand the risks involved and their effect.
2. It helps companies do forecasting and help them make better decisions.
3. It helps them choose investments wisely.
4. It helps companies increase the value of the firm and increase the wealth of the shareholders.
5. It provides company to have a better control over expenditure.

It helps companies refrain from over and underspending. There are many different techniques and methods available for capital budgeting. A company can choose the best method as per given situation and scenario and derive to the best decision.

Real world capital budgeting examples

Boeing made a great gamble when it developed its 757 and the 767 jets. Around USD 3 billion were invested for these projects, and the amount was twice the amount of shareholder investment. The bet proved to be profitable for the company. By the year 2002, Boeing was getting a profit of dollar 10 billion, and the planes were in still in demand and were selling.

Capital budgeting may also be done for intangible assets. For instance, Gillette spent over more than dollar 300 million towards advertising for its new product the Mach 3 razor. The investment was guided towards brand promotion, recognition, popularity and market acceptance.

Reckitt Benckiser acquired the Indian pharma company Paras Pharmaceuticals in the year 2013. Reckitt arrived at the acquisition decision after doing corporate budgeting analysis using techniques including discounted cash flow and NPV analysis. Paras holds many highly successful over-the-counter products and brands in India and neighbouring countries and was brought by Reckitt Benckiser at and cost of around USD 726 million.