Evaluating Capital Projects and Budget Decisions

Abstract

Each year governments receive more funding requests for capital projects from various agencies and departments than the governments can realistically undertake. This makes it necessary for the decision makers to carefully evaluate each project before deciding which ones to accept and which ones to reject. Whether the projects are selected independently or in conjunction with other projects, each must be justified, first and foremost, on the basis of the critical needs of the government. Additionally, the decision must take into consideration the resource base of the government and, more important, the costs and benefits the projects will produce for the government and the political jurisdiction it serves. This chapter discusses some of the commonly used methods for evaluating capital projects. Of the methods discussed here, cost-benefit analysis has been extensively used in government than any of other method because of its versatility and established history. Although not as common in government as they are in the private sector, the chapter also looks at risk and uncertainty associated with capital projects, as well as the measures to deal with the problems. Finally, the chapter concludes with a brief discussion on the need to use depreciation for capital assets.