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Level: Advanced
TCM Section(s):
3.2. Asset Planning
3.3. Investment Decision Making
Venue: 2021 AACE International Conference & Expo
Abstract: Capital budgeting is crucial to the success of corporations. Capital projects, which make up the major portion of long- term assets on a balance sheet, can be so large, that sensible capital budgeting judgments on project selection and funding ultimately decide the future of many corporations.
Since, capital decisions cannot be reversed at a low cost, any capital budgeting mistakes are costly. The capital investments of corporation describe it better than its working capital or capital structures, which are intangible and tend to be similar across businesses.
Hence, capital budgeting, especially project selection decision criteria, is critical. Cost engineers across the industry use several important criteria to evaluate capital investments. The two most comprehensive measures of whether a project is profitable or not are the net present value (NPV) and internal rate of return (IRR). For mutually exclusive projects that are ranked differently by the NPV and IRR, it is economically sound to choose the project with the higher NPV.
The paper will illustrate why it is desirable for cost engineer to pick a capital project with a higher NPV compared to IRR and paper also illustrates the identification problems associated with the IRR rule.
The paper will illustrate other capital budgeting criteria’s frequently used, and essential for cost engineer functions including funding decisions, as optimistic NPVs ideally boost the corporation value.
Level: Advanced
TCM Section(s):
3.2. Asset Planning
3.3. Investment Decision Making
Venue: 2021 AACE International Conference & Expo
Abstract: Capital budgeting is crucial to the success of corporations. Capital projects, which make up the major portion of long- term assets on a balance sheet, can be so large, that sensible capital budgeting judgments on project selection and funding ultimately decide the future of many corporations.
Since, capital decisions cannot be reversed at a low cost, any capital budgeting mistakes are costly. The capital investments of corporation describe it better than its working capital or capital structures, which are intangible and tend to be similar across businesses.
Hence, capital budgeting, especially project selection decision criteria, is critical. Cost engineers across the industry use several important criteria to evaluate capital investments. The two most comprehensive measures of whether a project is profitable or not are the net present value (NPV) and internal rate of return (IRR). For mutually exclusive projects that are ranked differently by the NPV and IRR, it is economically sound to choose the project with the higher NPV.
The paper will illustrate why it is desirable for cost engineer to pick a capital project with a higher NPV compared to IRR and paper also illustrates the identification problems associated with the IRR rule.
The paper will illustrate other capital budgeting criteria’s frequently used, and essential for cost engineer functions including funding decisions, as optimistic NPVs ideally boost the corporation value.