This week, we develop the theory and application of capital budget analysis. The theory was robust, the calculations mathematically and logically defined, and many of the real-world problems, likely to be encountered, were addressed. As capital budgeting essentially re-invents the company through major long-term expenditures it is arguably one of the most critical functions that financial management performs. However, based on my personal experiences, extensive empirical data, and antidotal data – many firms routinely experience significant failures in their selection of capital projects.
The assignment for this topic consists of three parts:
1, Part 1, I would like for you to briefly review either your personal experiences and/or the financial literature to identify and present a description of one actual capital project/product failure and the reasons attributed to the failure.
Remember this is a one to two paragraph exercise – do not go overboard – a few hours research and summation is all that’s required. I am interested only in your short, concise description of the project and the major reasons you believe it failed.
In your response please provide financial information regarding the project (what is available): initial outlay, projected cash flows, final dollar losses.
2) Part 2, Synthesize your one-paragraph position on what 3-5 specific factors you believe most likely to contribute to capital project analysis failure.
3) Part 3, Reflection – the students also should include a paragraph in their own words reflecting on specifically what they learned from the assignment and how they think they could apply what they learned in the workplace.
Use material from this weeks as reference
Read sections 1, 2, and 4 of chapter 11 Capital Budgeting