Linking capital allocation to individual capital expenditure decisions
I just finished reading an excellent new book on Value Based Management called "Questions on Value". One of the 11 papers in the book is about "Linking capital allocation to individual capital expenditure decisions".
In this article Erik Ottosson and Fredrik Weissenrieder from Anelda AB write that managers are increasingly focusing on cash flows and discounted values when making decisions regarding capital expenditure. But to evaluate actual outcome, instead of monitoring realized cash flows, they measure accounting profit. They recommend to improve this feedback loop to make sure management and investors are able to evaluate the actual performance of investment decisions.
In the rest of this article highly worth reading the authors explain how individual capital expenditure decisions can be made part of a larger screening and capital allocation process.
The part of the article I found most interesting is where the authors explain that and how investments in new business and technology creating new value (strategic expansion investments) should be differentiated from investments in existing business and technology to defend existing value (major strategic replacement investments and maintaining investments).