Monday, June 10, 2013

Sustainable Capital Budgeting

Sierra Nevada, maker of the famed Pale Ale, has utilized sustainable practices since the company's inception, largely as a measure to reduce costs. As the company has grown, it has retained the practice but has taken a more stringent examination of new projects. But, Bill Bales, the company's CFO, has noted that vendors often present unrealistic results. With energy-savings projects, vendors typically use future energy costs that are out of line with today's relatively low costs. Additionally, vendors account for tax credits that are unavailable to the company. Perhaps most egregiously, vendors will alter the capitalization rate (WACC) to make a project's NPV positive. As Bales notes, "What was wrong with the capitalization rate to begin with?"