Capital Budgeting: Don't Take Capital Expenditure Evaluation Lightly When Acquiring Fixed Assets, Warns Theodore Chen, Who Recommends the Discounted Corporate Cash Flow Method

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Making a wrong choice when acquiring capital assets could drain your firm's finances over a long period, since they can't readily be sold off to solve short-term cash flow problems. The capital budgeting process is, therefore, crucial--particularly to SMEs that can't afford to tie up money in under-utilised fixed assets. Yet a big proportion of firms in Hong Kong, where my university is located, don't use any scientific method to inform such decisions.

Capital expenditures usually fall into one or more of the following categories:

* Capacity expansion.

* Equipment replacement.

* Government regulation.

* Cost reduction.

* Efficiency improvement.

* Revenue generation.

Those in the first three categories usually …