# Use the capital budget to determine the project cost

Source: Internet
Author: User

The capital budget is used to determine a project and compare New Software ApplicationsProgramWhether it can bring economic benefits to your company. Another definition of capital budget is financial analysis of the ratio of capital flow to internal income. Regardless of how your company determines the ROI, the goal of the capital budget is to determine whether the project is worthwhile based on a clear understanding of the financial investment and income involved in the project.

To determine the funds required to carry out an IT project, enterprises must perform a detailed analysis of the expected benefits, risks, and costs of the project. In an environment where enterprises carefully examine the project's capital investment and the competition for financial resources is fierce, information on ROI and project benefits will become a key factor for project adoption.

There are many factors to consider when calculating project fees. Direct Material acquisition costs, such as obtaining materials, hiring contract workers, and purchasing hardware, are only part of the story. The difficulty lies in the costs such as insurance, employee benefits, software authorization, taxation, various fees and training.

Once an enterprise has a complete picture of the cost of the entire project, it now needs a financial analysis of the expected benefits and ROI. Simply put, the cost of the entire project should be lower than expected. To calculate these benefits, enterprises can use several general financial models.

For application developers, to make a project pass, you usually need to have a basic understanding of the financial model used by the enterprise. To determine the project cost, ROI calculation is required. Understanding how your company completes this job will become a key factor in your investment in the negotiation process.

Let's take a look at some basic financial principles and financial models.

Capital Flow

This is a long-term tracking of the entire project's capital investment and annual income.

Time Value of capital

This concept is basically like this. The current value of a dollar bill is higher than its future value because it can be invested to make profits. To calculate the time value of capital, you can use this formula: future value = current value * (1 + annual average profit margin) ^ investment turnover time (note: ^ indicates the meaning of exponential operation ).

Input Composition

That is, all aspects of capital use. It usually includes an analysis of the costs associated with stock issuance, bond issuance, and Income retention. For example, the fee for issuing a stock includes paper, ink, processing, and signature.

ROI Analysis

The ROI analysis determines the time it takes to reclaim all investments by calculating the company's capital inflows. In this method, projects with short payback periods have more advantages than those with long payback periods. Theoretically, a project with a short payback period is far from a project with a long payback period, because an enterprise can withdraw its investment more quickly.

Discount Collection Analysis

Similar to the standard payback period analysis, the discount payback period analysis method first uses the capital cost to discount the fund flow.

Statistical investment income ratio

Enterprises can calculate the income ratio by calculating annual income and capital depreciation and dividing by the initial investment.

Net income

Although it is similar to the discount recycling analysis method, this method focuses on the final amount obtained by adding all the discounted cash flows together. Enterprises should consider projects with a positive net income or projects with a higher ROI than input.

Internal fund Return Rate

This is a discount rate, and the current value of the fund flow is equal to its initial investment. In other words, the internal return rate is the current discount return rate of zero net assets.

Corrected internal fund Return Rate

This method is basically the same as the internal fund return rate, unless the enterprise assumes that it will re-invest the annual income to the enterprise at the current capital cost.

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