To Spend or Not to Spend – Improving the Evaluation of Capital Expenditures

Abstract

The evaluation process for capital expenditures has become increasingly challenging in an increasingly international marketplace and amidst rapid technological change. Key recommendations for improving the evaluation process are outlined. It is argued that, from the company′s strategic plan, one should develop a common set of planning assumptions, on the basis of which projects are first selected. A formal manual should be prepared, setting standards for the evaluation process. Financial approaches can help quantify the many risks associated with a project. Protection against such risks can be sought through international diversification, purchase of insurance, or even hedging in financial markets. The impact of international competition in local markets is a key risk which should be considered. Possible strategies to avoid rapid obsolescence are a quick review process, continuous upgrades, refusal to be stampeded by equipment manufacturers, and the option of buying new technology. Wherever possible, projects should be implemented using a phased approach.

Citation

Sokol, R.J. and Lipson, W. (1989), "To Spend or Not to Spend – Improving the Evaluation of Capital Expenditures", Industrial Management & Data Systems, Vol. 89 No. 7, pp. 9-14. https://doi.org/10.1108/02635578910132873