Managing IT Projects

Capex Request Document 

The information included in a CAPEX request should show:

1. The purpose of the project;
2. The timing and amount of the cash flows expected;
3. The timing and amount of investment required, the residual value, if any, at the end of its useful life and the degree of accuracy of the estimates;
4. The major assumptions underlying the cash flow estimates;
5. The economic desirability of the project and the sensitivity of the discounted cash flow rate to changes in the basic data;
6. Alternatives to the project, if appropriate, and their implications for the economics of the project;
7. Implications of not proceeding with the project;
8. The financing method or availability of internally generated funds to underwrite the project; and
9. The actions recommended.

Examples of reasons for capital expenditures are:

1. Expansion,
2. Maintenance of the current level of activity,
3. Cost reduction and/or quality achievement,
4. Replacement,
5. Modernisation,
6. Research and development,
7. Protection of property,
8. To meet legal requirements, and
9. Safety and health.

You should use Discounted Cash Flow analysis for the first 5 of the above examples. The last four examples are usually assessed on more qualitative grounds.

Where a CAPEX Request releases existing assets, a retirement request should accompany and form part of the appropriation request.

Retirement requests should clearly indicate if the asset is to be sold or retained for future use.  If retained, a justification is required for retention compared to disposing of the asset for cash.  Sound financial management requires that assets no longer required be sold and the cash obtained used to earn a return elsewhere in the organisation.

A retirement request should state why the assets were no longer required, and should indicate their original cost, age, dismantling costs and expected salvage value.  This would guide the decision maker on the reasonableness of the value to be obtained on disposal.

The value on disposal also presents problems in determining the levels of authority for approval.  The project’s original cost is used to determine the authorisation level of approval.