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.
Look at the following companies – Apple, Microsoft and Cisco Systems. 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 any 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…Also 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 Microsoft’s big bet on Nokia and the capital invested justify the risks?
What direction of capital budgeting has Apple taken versus a Google that has bet heavily on Android?
Look at Capital Budgeting as a business and operating decision across many industries. Also, take the time to look at the three tech companies’ cash flow statements, under the investing cash flow section to see how much of their cash goes toward capital expenditures, or capital expenditure.