Cognitive Approaches to Specialist Languages

Chapter Six
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(https://www.coursehero.com/file/p360qg/Step-1-Establish-budget-period-

review-program-achievements-and-financial).

Capital expenditures entail both large and permanent commitments for the

future. Common risks include cost overruns and forecasting error in the

future productivity of the investment (Patterson 2011a: 82).

Capital budgeting is undoubtedly a decision making process related to
predicting FUTURE and sequencing events that will take place in the
space of time. It uses management accounting calculations to determine
whether, for example, a firm should invest in long term assets, i.e. to spend
money on capital expenditures. This, in turn, leads to risk taking. Thus,
predicting FUTURE in the expenditure budgeting process can be
formulated as a procedure with a number of chronologically ordered steps,
each of which requires careful planning and decision making on the part of
the financial manager:

Table 1. Capital Expenditure Budgeting Steps (Patterson 2011a: 80).

Step Description
Opportunity
Identification

Using market research, consumer feedback, research and
development, competitor scans, employee ideas, etc. to
generate potential investment options
Specifying Cash
Flows

Estimating the relevant (i.e. incremental) cash flows, both
positive and negative, which will result from each
investment
Cost of Capital Calculating total cost of financing resources, both tax-
deductible debt and equity, adjusting for the firm’s risk
Risk Analysis Assessing the risk involved in each investment opportunity
based on the predictability of relevant cash flows
Applying
Acceptance Tests

Applying decision riles to determine whether shareholders

value is increased, net of the cost of capital and risks costs

The ability to predict FUTURE is equally important both in asset
management and funding management. The use of models to predict the
behavior of financial entities is called financial modeling. Models can
range from a simple forecast of a business enterprise’s cash flow to fair
value estimates of sophisticated derivates. The most advanced models use
statistical analysis of past events to try to project the future with
probabilities of occurrence assigned to a range of outcomes (Patterson
2011b: 33). Specific examples of financial models include valuation
models such as the Dividend Growth Model, which values a business
based on its stream of future dividends, and Asset Valuation Model,