Keywords capital budget, flexibility, risk, uncertainty, investment process
Abstract Within the framework of the Swedish Armed Forces investment in Strategic Research Cores, the Swedish Defence Research Agency has been commissioned to develop a capital budget that takes explicit account of uncertainties. Such capital budgets become particularly interesting in conjunction with decisions regarding large-scale, irreversible investments where there is an underlying risk that external changes could make the investment unusable. In 2008, the study focused on commencing the development of a capital budget that could be used to evaluate whether investments in flexibility were worthwhile when the Swedish Armed Forces were faced with making a large-scale, irreversible investment. With this purpose in mind, civil, capital-intensive compaanies and other military authorities were asked about how they appraise investment proposals. An initial conclusion is that military authorities appear to lack the structure and standardisation that characterise the investment processes at the civil companies. A second conclusion is that net present value computations are used - in one case a method is used to take into account the consequential costs generated by integrated systems. A third conclusion is that flexibility appraisals ought to be made for large-scale investments. It is therefore recommended that the Swedish Armed Forces - create the methods and processes necessary to make a standardised appraisal of large-scale investments, - take into account the consequential costs that derive from, among other things, integration with other systems, - evaluate flexibility, when necessary, in conjunction with investment decisions.