Capital Budgeting Process

The first step when issuing a bond is to identify an underwriter and a bond counsel. Their purpose is to provide legal and financial advice to the issuer. The next step is to select a bond trustee and credit enhancer. They act as receiving agents on behalf of the issuer. Then, the issuer, underwriter, bond counsel, trustee and credit enhancer collectively prepare the disclosure document and bond ordinance. After the documents are ready, they are issued to the potential purchasers for a given marketing period, usually one week. The next step is for the issuer to present the potential purchasers with a purchase proposal in a public meeting, after which the issuer makes a deal to sell the bonds. After the end of the purchase period, the participants close the process by exchanging various closing documents (Unkovic, 2000).

The main purpose of a lease is to acquire the use of a property for a given period without having to commit large amounts of capital in purchasing the property. A lease also allows a property user to get into a contractual agreement with a property owner. The main types of leases are operating lease and capital lease. Operating lease is a rent agreement whereby the lessee obtains property rights from the lesser for a period of less than one year and agrees to pay lease payments for that period. Capital lease is a long-term lease whereby the lessee pays the lesser at least 90 percent of the value of the property. The lesser in return allows the lessee to use the property for a term equal to 75 percent of the property’s life. In many cases, at the end of the lease period, the lesser transfers ownership to the lessee (Brandenburg, 2012).

Short-term borrowing is a method of financing short-term business needs. Business owners usually acquire short-term loans, which are repayable in three months and in some cases within one year. Conversely, long-term financing is a method of financing large investments and expenses in a business. They range from long-term bank loans, debentures, to equity financing. The main sources of equity finance for not-for-profit healthcare organizations include sale of investments such as real estate and medical office premises; government donations; internally generated funds and donations from well-wishers (Zelman et al., 2009, p. 332).

Capital budgeting, also known as investment appraisal, “is a systematic process of identifying, analyzing, selecting and implementing investment projects with returns that are expected to span over more than one year” (Capital Budgeting Process; meaning and Process, 2010). The capital budgeting process entails creating a capital budget, which outlines a business’s strategic plan. It is meant to capture what the business plans are to achieve within a given time, usually between 3 and 5 years. The capital budgeting process covers not just sales and production budgets, but covers all aspects of business operation. Investment decision-making process present in capital budgeting involves identifying investment projects, screening the projects, scrutinizing and accepting the projects, and finally monitoring the projects.

The main types of discounted cash flow are present value, net present value and future value of cash flows. Present value discounted cash flow indicates the present value of future cash flows. It is used to determine how much an investor needs to invest in order to get a desired future amount. Net present value discounted cash flow is the present value of all future cash flows minus the initial capital outlay. It is used to evaluate the profitability of an investment. Future value of cash flow evaluates the future value of present cash flows. It assists investors to determine the value of their investments in the future (Ritcher, 2011). 

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