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Chapter 13: Capital Expenditures Assets to Be Bought, Sold, and Discarded
Summary
The capital expenditure budget reveals how much is required to invest in capital assets to meet
the nonfinancial manager's objectives, so that the division or department can function properly.
The manager should prepare the capital expenditure budget needed for his or her Responsibility
unit after consulting with engineering and technical staff. A capital asset cannot be bought unless
it has been included in the capital budget.

Budget Process

The four steps in the capital expenditure budgetary process are:

1. Approving the project

2. Approving the estimate

3. Authorizing the project

4. Following up
Capital expenditure policy should take into account:
 Desired rate of return
 Cost impact
 Age of existing assets
 Expected capacity of the item
 Asset life
 Growth potential
 Employee availability
 Competition
 Stage of the business cycle
 Legal liability exposure
 Regulatory requirements

The manager should set a priority ranking for capital expenditures in terms of operating
necessities and nonnecessities. These dates should be noted:

 Dates labor will be available

 Marketing schedules for products to be produced
 Delivery dates when items are needed

The capital expenditure budget lists capital assets to be purchased, sold, or discarded.
Capital expenditures may be made to replace obsolete machinery or to expand and improve
operations, such as expenditures for new product lines. The manager should evaluate
alternative capital proposals carefully.
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