Problem
Long-term Assets, Plant and Equipment, and Capital Assets are alternative names for the balance sheet entry that typically represents the most significant investment on a non-financial organization's books. On a macro level, aggregated new spending in this category represents Investment, the "I" component in Gross Domestic Product (GDP). Investment is closely watched and is interpreted as a signal of producer sentiment and is an important aspect of economic analysis and forecasting.
On a micro level, spending on capital assets shapes the organization's long-term prospects, including profitability, viability, and sustainability. The "capital budget" is informed by economic considerations, risk, and strategic direction.
Comment on the process your organization uses when considering investment in long-term capital assets. How does the organization determine whether the anticipated future benefits of a project or venture justify the cost? What metrics does the organization develop and scrutinize - accounting rate of return, payback period, net present value, internal rate of return, others?
How are the many inter-related strategic considerations brought into the discussion? Are there different approaches for strategically and economically analyzing replacement decisions, on the one hand, from various types of expansion decisions, on the other hand? (Examples of expansion decisions include but are not limited to: building for market opportunity in existing lines, new product development, new geographic opportunities, global markets, mergers and acquisitions.) How are expected sales or revenues forecasted and how do these forecasts impact customers, production, and suppliers? How does the organization consider risk and uncertainty when it analyzes long-term projects?
Not for profit and governmental organizations may have additional drivers for long-term capital spending such as funding sources, donor bases, and political constituencies and processes. Those of you employed by such organizations may want to comment about how these considerations inform your organization's investment decisions.