All you need to know about Capital Budgeting Process

1. University of Liberia
College of Engineering
Course: GENG 220 (Engineering Economics) Group Presentation
Group Name: Capital Investors ( Group B)
Presented To: Mr. Samuel Wonasue (Lecturer)
Date: July 18, 2017

2. Group Members
 Christian Weah --- Head 74555
 Nicholas N. Wilson 58067
 Samuel Sellu 57060
 Cheay Chooper 66980
 K. Chuchu Moore 83384
 Fahn Ketter 66405
 Matthew Dakemu 77716
 Beyan Massaquoi 57928
 Martin D. Freeman 54620

3. Title: Capital Budgeting
Process

4. Definition
• Is the process of planning expenditures that will generate cash
inflows expected to expand over a period of one year.
• Is a scientific process of identifying, analyzing, selecting and
implementing investment projects with returns that are
expected to span over more than one year. Capital budgeting
is also referred to as investment appraisal.

5. • Capital Financing and Allocation Functions
are primary components of Capital Budgeting
Process
• Both are closely link and are simultaneously
managed as part of the capital Budgeting
Process

6. Capital Financing and Allocation
Activities
The amount of Funds needed from investors, and
lenders as well as funds available from internal
sources to support new capital projects are
determine in the Capital Financing Functions

7. Capital Financing and Allocation
Activities
• Selection of the engineering projects for
implementation occurs in the Allocation Functions

8. Capital Financing and Allocation
Activities

9. Sources of Capital Funds
• Debt Capital
• Equity Capital

10. Capital Asset Pricing Model (CAPM)
• It is a model that describes the relationship
between expected return and risk of a
security.
• CAPM Formula and Calculation
• Ra=Rfr + Ba ( RM-Rrf)

11. Weighted Average cost of Capital
• Weighted average cost of capital (WACC) is the average rate of
return a company expects to compensate all its different investors.
• Here is the basic formula for weighted average cost of capital:
• WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]
E = Market value of the company's equity
D = Market value of the company's debt
V = Total Market Value of the company (E + D)
Re = Cost of Equity
Rd = Cost of Debt
T= Tax Rate

12. Separation Principle
• It is a concept that separate a firm investment
decision from its financing decision.
• The Separation Principle is used to bring out
the project cash flows of a particular project.
It is an important part of capital budgeting.

13. Project Selection
• Selection are based according to
• The IRR,
• annual worth (AW) method,
• future worth (FW) method,
• or present worth (PW) method.

14. Project Types
• Mutually Exclusive
• Mutually Independent

15. Classifying Investment
• Improved facilities—for process improvement,
cost savings, or quality improvement
• Necessity—for service facilities, emergency
replacements, or for the removal or
avoidance of a hazard or nuisance

16. Classifying Investment
• Expanded facilities
• Research and development

17. Capital Allocation
• capital expenditure decision-making process

19. Thank You