Capital Budgeting the Company Is Research Proposal

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The risk of the project is another key consideration. The net present value calculation is based on a set of assumptions about the future cash flows. However, the sensitivity of these cash flows to external or internal events may vary from project to project. Managers and shareholders are often risk averse in nature, therefore the relative risk level of the plant expansion will be taken into consideration prior to project approval. As sensitivity analysis can be used to demonstrate the degree to which certain assumptions are important to the final cash flow projections.

Another potential hurdle to overcome is that of the public image for the project. In this case, there is little potential for public relations disaster, unless the plant expansion will result in environmental catastrophe. However, the company is likely to guard its image carefully so the project will benefit if its proponents spin it as improving the company's image by generating domestic jobs and building the brand overseas.

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Capital budgeting is a more complex process that simply crunching a few numbers to get an NPV or IRR. Managers typically compete against each other for project approval. Thus, they need to not only bring evidence of sound returns, but also of low risk. They need to expend political capital and assuage all concerns that the approvals committee or senior management might have, in order to see their projects approved. Expanding the factory to accommodate expansion into international markets is a potentially lucrative venture, but one that is quite risky. Moreover, the cash flow reality is likely to vary significantly from projections, generating further risk that management will need to take into consideration in order to see the project approved.

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