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nature and serve as a complement to the Capital Programming Guide. In constructing The
Executive Guide, the GAO identified and studied several government and private
organizations that are recognized for outstanding capital decision-making practices. The
organizations studied are as follows:
• State of Maryland
• State of Minnesota
• State of Missouri
• State of Virginia
• State of Washington
• Dayton, Ohio
• Montgomery County, Maryland
• Phoenix, Arizona
• Ford Motor Company
• General Electric
• Mobil Corporation
• Texas Instruments
The Executive Guide divides the desired capital budgeting attributes into five broad
principles as follows:
Principle 1: Integrate organizational goals into the capital decision-making process.
Principle 2: Evaluate and select capital assets using an investment approach.
Principle 3: Balance budgetary control and managerial flexibility when funding capital
projects.
Principle 4: Use project management techniques to optimize project success.
Principle 5: Evaluate results and incorporate lessons learned into the decisionmaking
process.
B. PRIVATE SECTOR CAPITAL BUDGETING PRINCIPLES AND METHODS
This section will describe the capital budgeting process for organizations in the
private sector. Specifically, the section will define capital budgeting, discuss the primary
capital budgeting decision criteria, introduce some guidelines that are used to make capital
spending decisions, and explain how risk is incorporated into the capital budgeting process
in the private sector.
1. Capital Budgeting in the Private Sector
Capital budgeting is the area of financial management that establishes the criteria for
investing in long-term projects. More often than not, these projects involve the acquisition of
property, plant, and equipment. Simply put, capital budgeting is “The decision-making
process with respect to investment in fixed assets” (Keown et al., 2005). This decisionmaking
process helps private organizations determine whether or not to accept or reject a
proposed capital investment project. A fixed asset, also known as a capital asset, is defined
as, “A long-term, tangible asset held for business use and not expected to be converted to
cash in the current or upcoming fiscal year, such as manufacturing equipment, real estate,
etc.” (http://www.investorwords.com). Since cash can be classified as a “benefit” to the
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