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Capital Budgeting and Financial Planning

Capital Budgeting and Financial Planning. Course Instructor: M.Jibran Sheikh Contact info: jibransheikh@comsats.edu.pk. CAPITAL BUDGETS FOR SOCIAL SECTOR. Capital Budgeting. Capital Budgeting is a process used to evaluate investments in long-term or capital assets. Capital Assets

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Capital Budgeting and Financial Planning

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  1. Capital Budgeting and Financial Planning Course Instructor: M.Jibran Sheikh Contact info: jibransheikh@comsats.edu.pk

  2. CAPITAL BUDGETS FOR SOCIAL SECTOR

  3. Capital Budgeting • Capital Budgeting is a process used to evaluate investments in long-term or capital assets. • Capital Assets • have useful lives of more than one year; • analysis requires focus on the life of the asset; • low-cost, long-lived assets are not usually subjected to the Capital Budgeting process; • cost often makes it necessary for the organization to finance the asset using long-term financing from capital campaigns, mortgages, long-term loans, leases, and equity offerings.

  4. What are capital assets? • They are used in the production or supply of goods and services (productivity criterion), • Their life extends beyond a fiscal year (longevity criterion) • they are not intended for resale in the ordinary course of operations • Their treatment as a capital assets is of value (materiality principle)

  5. Types of Capital Budget Actions Capital Acquisitions Capital Improvements Maintenance

  6. Investment involves along-term commitment. Outcomeis uncertain. Decision may bedifficult or impossibleto reverse. Large amounts ofmoney are usuallyinvolved. Risk in Capital Investment Decisions Capital budgeting:Analyzing alternative long-term investments and deciding which assets to acquire, eliminate or renovate

  7. Why Prepare a Capital Budget? • Since the investments are large, mistakes can be costly. • Since capital acquisitions lock the organization in for many years, bad investments can hamper the organization for many years. • Since capital assets have long lives, they must be looked at over their lives. Operating budgets do not do that.Value of accrual basis here. • Since the cash the organization uses to buy the capital asset is not free, managers must include the cost of that money in their analysis.

  8. Some uniquely public sector issues in capital funding • Social/economic goals versus monetary – regional distribution, make-work projects • Depreciation and replacement • The border-line between capital and operational budgets and its impact on financial reporting of deficits, etc. • Asset valuation and management • Investment strategies – debt, current funds, other party investment

  9. Capital assets age and break-down!

  10. Steps in the Development of a Capital Budget • Inventory of Capital Assets • Development of a Capital Investment Plan • Development of a Time-Sensitive CIP – multi-year projection • Development of a Financing Plan • Approvals, consultations, winning support, and implementation

  11. Inventory of Capital Assets • Life cycle assessments – replacement plans • Depreciation schedules: accrued value or replacement value • Provides information on the capacity of the infrastructure in place

  12. Capital Investment Plan • Primarily a planning document – not necessarily fully funded • Relating it to the agency’s or government’s overall objectives and priorities • Danger of ‘hidden’ capital costs not attracting public or political attention: replacing computers, buildings, sewers • Danger in ‘all to obvious’ capital renewal costs getting priorities: potholes

  13. Developing a Multi-Year Plan • Reinforces the cyclical nature of capital costs – recurring expenses • Permits inclusion of maintenance and preventive costs of capital • Permits some entities to consider various longer-term funding strategies

  14. Development of a Financing Plan • Complexity varies dramatically • Ranges from drawing on appropriated funds completely right through to public-private partnerships, bonds issues, specialized financing strategies such as user fees (airports) • Increasing trend to look at creative options

  15. Capital Funding Alternatives • Internal Funds • DEVELOPMENT CHARGES • OPERATING FUNDS • SPECIAL RESERVES • CAPITAL DEVELOPMENT • REPAIR AND MAINTENANCE • LIFECYCLE REPLACEMENT – THINK SYSTEMS • EXTERNAL FUNDING • LEVIES • SPECIAL CHARGES – AIRPORT TAX • PRIVATE FUNDING - PPPs • DEBT

  16. Range of Options, Risk and Delivery Tools Source: British Columbia, “Capital Asset Management Framework”

  17. Other Important Concepts for Budgets and Planning • Costing and costing issues • Cost/Benefit Analysis • Time Value of Money

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