Management's Primary Goal Is to Maximize Stockholder Wealth s1

FM12 Ch 11 THE BASICS OF CAPITAL BUDGETING

Capital expenditures and investment – IBM

Capital budgeting is the process of evaluating potential projects and determining which are likely to be profitable and which are not. A company's capital budget is a function of its corporate strategy, and its effects are felt throughout the organization long after the actual decisions are made. Because of the size and importance of capital investments, companies must ensure that their capital budgeting decisions are based on good information and sound analysis. For a large, multinational corporation like IBM, there are many challenges in the capital budgeting process. This cyberproblem will use IBM’s website (http://www.ibm.com/us) to answer the following questions. From the site’s front page, access “IBM Research” (it changes from year to year, but it is probably in the “About IBM” section under the section “What we think”). View the entire project list. As you see, IBM has a huge project portfolio. For large companies, many projects will turn out to be negative NPV projects, but the hope is that the positive NPV projects outweigh the negative ones. Respond to the following directions regarding IBM’s investment policies. a. Choose one project from the list and describe in a paragraph or two what the project is and what resources it requires. b. From the “What we do” page, go to “Work with universities” and select a project from IBM’s recent collaborations. Describe in a paragraph what this project is. c. From the “What we do” page, go to “Work with clients” and select a project from IBM’s recent collaborations. Describe in a paragraph what this project is. d. Go back to the IBM front page, choose About IBM, and access the “Investors” section. Go to IBM’s most recent annual report and look at the financial report. How much did IBM spend on research, development, and engineering in the most recent year? How did this compare with the previous year?