Companies of any size and entrepreneurs starting a new business should have a Research and Development Department. That department, along with usually a committee composed of finance, marketing, technology, and other executives are charged with coming up with ideas to improve the company and the products and services offered by the company. Research and development are not free to a company. It is a cost/benefit operation. Well-managed firms go to great lengths to develop good capital budgeting proposals that provide value to the firm and the economy at large. There are numerous types of capital budgeting projects. Let’s look at a few of them. A new product or a new target market could, conceivably, change the nature of the business. It should be approved by higher-ups in the business organization. A new project, either a new product or a new target market, requires a detailed financial analysis and the approval of possibly even the firm’s Board of Directors. An example of a new product would be a new medical device that is conceived, researched, and developed by a company specializing in medical devices. Perhaps this medical device would tap into a target market that the company had not yet been able to reach. A detailed financial analysis is required, but not as detailed as that required for the expansion of the company into new products or new target markets. It is a simple capital budgeting project to evaluate. It would be possible to use one of these simpler capital budgeting methods to evaluate this project and abide by the decision of the capital budgeting method. The cash flows from a replacement project necessary to continue operations, as usual, are fairly easy to estimate, at least compared to other types of projects, because the business owner is replacing the same type of equipment and is, therefore, somewhat familiar with it. This type of capital budgeting project would require a detailed financial analysis with cash flows estimated from each piece of equipment to determine which generates the most in cash flows and, thus, saves money. These are the four basic types of capital budgeting projects, although there are offshoots of each one.
