The escalation of societal, environmental, and economic evils has led various individuals to question the role of capital budgeting in the society. Subsequently, capital budgeting can help managers to address these social-economic challenges. However, the individuals must assess the ethical, social, and environmental effects of capital budgeting strategies before using them. Arguably, leaders cannot achieve the objectives of their capital budgeting strategies without using a value-based leadership approach, while trusting in God with all their hearts.
Capital budgeting takes into account computing a project’s payback, which is a risky venture. A short payback period is less precarious as compared to an extended payback period in organizations (Kahraman, Ruan, & Tolga, 2002). However, when computing a project’s payback, only the cash obtained before the procedure is considered, thus, leaving the cash flow that occurs after the payback process. Likewise, the net present value involves the measurements of contributions that the dollar offers to the organizational stakeholders. However, the disadvantage is that when computing the net current values, individuals do not measure the size of the project (Murphy & Simon, 2002).
The advantage of computing the interest rate return is that it depicts the yields obtained from the original invested capital. However, when calculating the interest rate of return, the disadvantage is that it can provide conflicting results (Kahraman et al., 2002). Likewise, return on investments can help individuals to measure divisional profitability. Since the managers know that the measurement of their performance relies on how they utilize organizational assets to get profits, they will be intrigued to use the resources optimally. However, divisional managers might only choose the investments that will lead to more return rates in return investments (Bierman & Smidt, 2012).
Indeed, capital budgeting is both advantageous and disadvantageous to managers. For instance, failure to plan the internal rate of return, project remuneration, current net value, and return on investment of an organization carefully can be risky. However, if leaders use value-based strategies and trust in God to complete tasks, they can manage their finances with integrity.
- Bierman Jr, H., & Smidt, S. (2012). The capital budgeting decision: economic analysis of investment projects. Routledge.
- Kahraman, C., Ruan, D., & Tolga, E. (2002). Capital budgeting techniques using discounted fuzzy versus probabilistic cash flows. Information Sciences, 142(1), 57-76.
- Murphy, K. E., & Simon, S. J. (2002). Intangible benefits valuation in ERP projects. Information Systems Journal, 12(4), 301-320.
