A comparison of capital budgeting models: local versus global viewpoints

This research studies the financial aspects of capital budgeting models in both the local and global perspectives. Since the development of the simple payback method, capital budgeting models have been employed as relative local measures of project evaluation. Because these tools analyze at a static local level, they are limited. By adopting simulation, the effects of capital expenditures and crucial interaction of resources in a dynamic global environment can be studied. Simulation software has improved greatly over the past few years and is becoming more and more common in the manufacturing and consulting environments. Hardware and software technology can provide a real opportunity for those making decisions regarding capital expenditures and can provide opportunity in the decision‐making process of the “what‐if?” scenario. Even though the traditional local optimization measures of performance may show a major advantage in making a purchase, the results of the global measures of performance may show it would bring about a significant financial misfortune to do so. One proven way to determine if the capital expenditure will improve the global measures of performance of net profit, return on investment and cash flow is to model the scenario through the use of computer simulation.