Cyberproblem

Capital Budgeting - 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. Use the "Financial Condition" section of the management discussion found in IBM's 2001 Annual Report (see http://www.ibm.com/annualreport/2001) to complete this exercise.

1. In addition to current operating performance, firms must never lose site of organizational goals and the need to maintain distinctive competencies. For that reason, firms must always be looking toward the future and ensuring success down the road. With that in mind, what investments did IBM make in 2001 to fund future growth and increase shareholder value?
   
   
2. How does Standard & Poor's rate IBM's senior long-term debt, preferred stock, and commercial paper?
   
   
3. Briefly describe IBM's investment in new software research, development, and engineering. Did IBM amortize more or less capitalized software costs during 2001, compared to 2000? Why was there a difference?
   
   
4. To analyze the sources of specific risk, IBM uses sensitivity analysis to determines the impact of different market risk exposures on the fair value of the company's assets. What kind of financial instruments are included in this sensitivity analysis?
   
   
5. Explain IBM's process of sensitivity analysis.