CAT / FIA FMA Syllabus D. Budgeting - Capital expenditure budget - Notes ^{3 / 10}

Capital investment is often a large amount - this means the company will need to look for finance, both internally and externally.

The quality of management decisions relating to the acquisition of non-current assets will affect the level of profitability in a business.

Once acquired, assets must be used effectively.

A profitable rate of return must be obtained to justify the continued use of these assets and audit should be carried out to check that the expected benefits have been realized.

Steps

• Step1: Identify investment required

  The case for the expenditure should be summarised, preferably on a standard form, giving details of the equipment, etc, required, the anticipated cost and estimates of any internal materials or labour required for installation.

• Step 2: Evaluate capital expenditure

  The data presented should then be evaluated by the accounts department following the approach adopted by the organisation.  

  This approach may range from a simple payback assessment, i.e. how quickly will the investment be paid back from the profits arising, to more sophisticated procedures allowing for the time-value of money. 

  These methods will be described later on in this chapter.

• Step 3: Authorise capital expenditure and disposal

  Very large proposals may require approval by the board of directors, while smaller proposals may be approved at divisional level

• Step 4: Implement, monitor and review investments

  The time required to implement the investment proposal or project will depend on its size and complexity. 

  Following implementation, the investment project must be monitored to ensure that the expected results are being achieved and the performance is as expected: - this is known as post-completion audit. 

  The whole of the investment decision-making process should also be reviewed in order to facilitate organisational learning and to improve future investment decisions.