The last 10 million euros

Where should the last euro of your CAPEX budget go?

BOARDROOM QUESTIONS
The questions your portfolio should be able to answer.

The investment budget is in place.

100 million euros.

The projects are on the table. Production facilities, digitalisation, automation, new sites, energy efficiency, infrastructure and strategic growth projects.

90 million euros have already been allocated.

That leaves 10 million.

And suddenly, budget planning turns into a strategic capital decision.

What will you do with the remaining 10 million euros?

Do you invest in the project with the highest ROI?

In the project with the highest NPV?

In the most strategically important project?

Do you spread the money across several projects?

Do you accelerate investments that have already been approved?

Or do you not invest the 10 million euros at all?

The crucial question is not which project is good.

The crucial question is: where will the next 10 million euros generate the greatest additional value across the entire portfolio?

The last euro is no less important than the first

In many CAPEX processes, decisions are initially made on individual projects.

Project A has a positive business case.

Project B is strategically relevant.

Project C improves productivity.

Project D reduces risks.

Project E opens up a new market.

Each of these projects may make sense when considered in isolation.

But capital allocation is not simply a collection of individual business cases.

Capital allocation is a portfolio decision.

Because every euro allocated to Project A may no longer be available for Projects B, C or D.

The real question is: what does this euro displace?

An investment proposal normally shows what a project is expected to generate.

However, it does not automatically show what other uses of capital are thereby ruled out.

This is precisely where opportunity cost arises.

If 10 million euros are invested in Project A, the relevant question is therefore not only:

“What return does Project A generate?”

But also:

“What return, strategic benefit or future option is consequently not realised elsewhere?”

CAPEX has a marginal value

This leads to a further question that is of particular interest to executive boards and CFOs:

What is the next euro of CAPEX worth?

Suppose a company has a CAPEX budget of 100 million euros.

The portfolio can then initially be optimised for 100 million euros.

It can then be calculated how the optimal portfolio changes at 101 million, 105 million or 110 million euros.

This illustrates the additional value that extra capital can generate within the defined decision-making model.

In simple terms:

Marginal Value of CAPEX = Change in the optimised portfolio value / additional CAPEX

This shifts the discussion.

From:

“We need an extra

10 million euros in the budget.”

becomes:

“What

specific impact can an additional 10 million euros have on the portfolio?”

More CAPEX is not automatically better

The opposite can also become apparent.

Perhaps the first additional 2 million euros will generate significant added value.

The next 3 million euros, significantly less so.

And for the remaining 5 million euros, there may not be a sufficiently attractive use amongst the current projects and restrictions.

In that case, the economically interesting conclusion might be:

The optimal CAPEX budget does not necessarily have to correspond to the maximum available CAPEX budget.

The question is therefore not:

“How do we spend our entire budget?”

But rather:

“Given our objectives and constraints, what level of

capital generates which portfolio return?”

And what happens if 100 million suddenly becomes 90 million?

The same logic applies in the opposite direction.

The Executive Board is cutting the CAPEX budget by 10 million euros.

The obvious reaction would be to reduce existing budgets proportionally or to remove individual projects from the priority list.

However, mathematically speaking, this raises another question:

What does the best portfolio look like under the new budget cap?

After all, a 10 per cent reduction does not automatically mean that every project should be cut by 10 per cent.

Under a revised budget, a completely different combination of projects may prove advantageous.

Some

projects may be dropped.

Others may be added.

Dependencies alter the possible combinations.

Resource constraints may suddenly become relevant.

Strategic minimum requirements must still be met.

A new budget creates a new scope for decision-making.

The portfolio should be able to respond to a budget change

This is precisely where the CAPEX Live Boardroom Simulation begins.

Imagine the CFO asking a simple question during the board meeting:

“What happens if we invest a further 10 million euros?”

Or:

“What do we lose if we reduce the budget by 10 million euros?”

Traditionally

,

such a question can trigger new analyses.

Business units have to do the maths.

Controlling consolidates.

Finance reviews.

Assumptions are adjusted.

Presentations are updated.

Afterwards, everyone meets again.

With a mathematically modelled CAPEX portfolio, however, the changed budget constraint can be incorporated directly into the decision-making process and the portfolio recalculated.

Question. Calculate. Compare. Decide.

The last 10 million euros are a stress test for your capital allocation

As long as sufficient capital is available, many projects can be funded simultaneously.

Scarcity reveals the true priorities.

Which investment is truly strategic?

Which investment actually generates additional value?

Which projects are interdependent?

Which resources are becoming the bottleneck?

Which projects would you cut if you had one euro less?

And which ones would you add immediately if you had one euro more?

It is precisely at these thresholds that the quality of capital allocation becomes apparent.

StratePlan: Calculating the value of the next CAPEX euro

StratePlan does not view investment decisions in isolation, but as a portfolio subject to defined objectives and constraints.

Budget, expected economic or strategic benefits, resources, dependencies and other quantifiable conditions can be taken into account within the decision-making model.

If management changes an assumption or a constraint, the portfolio can be re-optimised under the new conditions.

This allows us not only to ask:

“Which projects should we fund?”

but also:

“What will the next euro of CAPEX bring us?”

“What will the last euro save us?”

“And at what budget level does the optimal project mix change?”

The Last €10 Million.

Where should the last euro of CAPEX go?

The answer should not depend on which business unit argues the loudest.

Nor should it depend solely on which individual project presents the most attractive business case.

It should emerge from the interplay of the entire portfolio.

Management defines objectives, assumptions and constraints.

The maths calculates the consequences.

The board decides.

DON’T TRUST US. CALCULATE IT.