Capital Budgeting and the Procurement of Equipment

Week 5 – Capital Budgeting and the Procurement of Equipment


Capital budgeting uses time value of money concepts to choose investments in capital equipment, types of financing, making decisions regarding courses of actions, and even whether a firm should stay within a line of business.  This has powerful implications for supply chain management, for the supply chain has to justify its worth just like any other side of the business.  Now that we have learned about how the supply chain affects cash flow and overall costs, it is now time to put these concepts into a framework in order to show supply chain managers how to justify a supply chain initiative, a lean cost savings change, or the purchase of capital equipment needed to help keep the business competitive. 


We will first learn (or review) some basic concepts around time value of money, which forms the basis of key capital budgeting models.  We will then cover the key capital budgeting measures such as payback period, accounting rate of return, net present value, and internal rate of return.  Lastly, we will look at several applications of the capital budgeting measures.  We will then take an extensive look at the actual procurement of equipment, which is an actual extension of the capital budgeting process.