Wednesday, February 8, 2012

Capital Budgeting

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

I do a lot of work on capital budgeting.  I teach several classes that focus on it, and of course it plays a major role in several of the training courses that we conduct for various organizations. 

 

I stress that organizations should use a lot of different techniques for capital budgeting including real option analysis, Monte Carlo Simulation, and decision analysis whenever possible.  Successful capital budgeting often is the determining point between whether a company is thriving or dying five years down the road. 

 

The capital budgeting task is filled with risk and uncertainty.  Given that, it is rare that the risk department is a fully integrated team into the capital budgeting process.  There are a variety of reasons for this; the silofication of treasury and finance functions, ignorance of capital budgeting techniques by risk managers, ignorance of risk management by the capital budgeting team, as well as a host of others.

 

I believe that if there is one area that risk managers could make a positive and significance difference it is early in the capital budgeting process.  Sad that this rarely happens.

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