Capital Budgeting

Front 1

What kind of purchases is capital budgeting used for? (3)

Back 1

1.) long life
2.) non-recurring
3.) expensive

Front 2

Operating budget

Back 2

For purchasing inputs for the continuing operations of the government

Front 3

Benefits of Capital Budget

Back 3

-Protect infrastructure from budget balancing cuts
-Regularize the provision of projects that have a long life (10-15 yrs), but have a high price tag relative to the resources of the government
-Capital projects would often be postponed when the operating budget is under pressure

Front 4

Disadvantages of Capital Budget

Back 4

-Can become hiding places for operating deficits
-Bias towards borrowing to finance all capital asset purchases
-Extra controls won't stop all infrastructure mistakes
-Availability of capital funds can sometimes influence the priority rankings

Front 5

Capital budget process

Back 5

-Inventory of capital assets
-Development of a capital improvement plan
-Development of a financing plan
-Implementation

Front 6

6 steps in Cost-Benefit Analysis

Back 6

1.) Specify the set of alternative projects
2.) Decide whose benefits and costs count
3.) Catalogue the impacts quantitatively over the life of the project and select measurement indicators
4.) Predict the impacts over the life of the project
5.) Monetize all impacts
6.) Discount benefits and costs to obtain present values

Front 7

Future Value

Back 7

FVn= PV(1+r)^n

Front 8

cost-benefit analysis

Back 8

A method of organizing information about a program under consideration "so that priorities may be reasonably established"

Front 9

What does cost-benefit analysis do?

Back 9

Estimates whether the gain to society (benefit) from the project is greater than the social sacrifice (cost) required to produce the project (if it is, then the project is worthwhile)

Front 10

Problems of Cost-Benefit Analysis

Back 10

C-B analysis provides info about the economic impact of projects and while many of these can be given $ values, some can't very easily.