Exam Preparation Using Exam Content: Capital Budgeting

Capital Budgeting

Capital Budgeting

This is the first in a series of posts that looks at preparing for an exam using some of the same concepts that you might study for the CMA, CPA, or CIA exams.

Capital budgeting is the process that a company goes through when it makes large capital investments or investments into long-term projects. As individuals, we do not have much need for capital budgeting, but one example of personal capital budgeting is the decision to pursue a professional certification.

Usually, when we make a decision to get a certification, we are focusing on the increased salary that we expect to receive as a result of having that certification. While that is obviously a great benefit (cash inflow), it is not the only element of capital budgeting that is part of this decision. There are also cash outflows associated with taking an exam.

When I teach capital budgeting, I always emphasize that we need to take into account the non-monetary qualitative factors (both positive and negative) involved in a decision. For example, how the project would impact employee morale, whether the project would have any public relations implications, and if the project is congruent with the company goals and objectives. These qualitative factors are difficult to put into an analysis but may be just as important as the quantitative factors (i.e. the cash).

Cash Outflows

Some of the cash outflows and qualitative considerations connected with pursuing a professional certification are:

  • The cost of the exam registration fees, including any re-takes (CMA Exam Costs, CIA Exam Costs)
  • The cost of study materials (CMA Study Materials)
  • The amount of time that you will spend preparing, which is an opportunity cost because while you are studying you will not be spending time with your family, exercising, reading, sleeping, working another job, etc.

Cash Inflows

Some of the cash inflows and other qualitative benefits that you will receive include:

  • The increase in your salary that is the direct result of gaining the certification
  • An increase in respect and reputation within your organization
  • An increase in confidence that comes with passing an internationally recognized professional exam.

The tools that a company uses to determine whether or not a project is beneficial include the payback method and the net present value method. Both of these can also be applied to making a decision about getting a professional certification.

Payback Method and Net Present Value

  • Payback method. Based on the expected raise from gaining a certification, you can calculate how many years you will need to work to earn back the costs of taking the exam.
  • Net present value. To calculate the net present value of a certification, you would need to determine a required rate of return. I am not sure how you would determine a required rate of return, but it could be based on how much you value your time. It would also be possible to calculate the Internal Rate of Return and see if that IRR is acceptable to you. But, however you calculate it, is the return acceptable to you?

Have you considered any other cash flows or qualitative factors in your decision to prepare for a professional certification? I’d be glad to hear from you in the comments about what they were.

Brian Hock, CMA, CIA

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