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10 Cards in this Set

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What kind of purchases is capital budgeting used for? (3)
1.) long life
2.) non-recurring
3.) expensive
Operating budget
For purchasing inputs for the continuing operations of the government
Benefits of Capital Budget
-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
Disadvantages of Capital Budget
-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
Capital budget process
-Inventory of capital assets
-Development of a capital improvement plan
-Development of a financing plan
-Implementation
6 steps in Cost-Benefit Analysis
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
Future Value
FVn= PV(1+r)^n
cost-benefit analysis
A method of organizing information about a program under consideration "so that priorities may be reasonably established"
What does cost-benefit analysis do?
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)
Problems of Cost-Benefit Analysis
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.