Management Reflection - week 6

For the last week of the accounting module, we learned about capital expenditure. Capital expenditures is when a company spends money to acquire an asset and instead to use it for a long term. For example a machine or vehicle. This matter is significant to any business since you are required to put down a large sum of money and because it will take a while before you can break even, it is uncertain that the asset can help you earn a profit. Therefore CAPEX must be carefully planned, if we did not budget enough for it, it can result in eg. not producing enough products to meet demands. If we over invest in the budget then we already lost the money since the very start with uncertainty that we'll be able to get it back.

To avoid these mistakes, we learned techniques which can help us make the right decision when it comes to CAPEX. There are two categories, non-discounting and discounted cash flow techniques. I learned that money has a time value, the value in few years time will be less than the value now. The non-discounting technique excludes the time value factor. The discounted cash flow technique on the other hand is a more accurate method when it comes to estimating CAPEX since it takes the time value into consideration.