Capital Budgeting and Cost of Capital
Capital budgeting is a multifaceted process that is crucial to good investment decisions by a business or company. This complicated process is defined as a procedure of determining whether an investment is beneficial or not. In essence, capital budgeting helps an organization or company to examine the attractiveness and profitability of an investment opportunity. During this process, companies have several opportunities, which are weighed depending on their potential for the purpose of making a comparison and choosing the most appropriate opportunity. Despite its complexity, capital budgeting is always used by companies as they seek to become more profitable through good investment decisions.
An example of a capital budgeting decision a company might need to make is the consideration of purchasing new equipment. A company may need to consider buying new equipment as part of its measures to enhance its production capacity. The expansion of production capacity can either be carried out on an existing product or on a new product that has been designed through research and development (Marzec, n.d.). The expansion of production capacity for an existing or new product is an important measure for many companies, especially in relation to enhancing organizational profitability....
Capital Budgeting Over the last several years, different levels of government have been facing a variety of challenges when it comes to budgetary issues. For the city of Ft. Lauderdale, the Department of Public Safety is encompassing 60% of their total expenditures every year. This is because it includes areas such as police and fire / rescue services. At the same time, many of these departments are subdividing into other areas
Capital Budgeting for Guillermo Furniture Guillermo Navallez, owner of the relatively small yet highly successful furniture manufacturer Guillermo Furniture, is faced with a tough decision. Due to changes in the industry an in his operating atmosphere, Guillermo is unable to continue competitively running his company as he has for the past decades, with a crew of skilled laborers building furniture and with distribution handled essentially by the company itself. He must
Capital Budgeting and Government Regulations Airline Industry LONG-TERM CAPITAL BUDGETING IN AIRLINE INDUSTRY Government regulation: Why or why not Major reasons for government involvement in a market economy Interests of stockholders and managers: The convergence Airline: Merger or new capital investment LONG-TERM CAPITAL BUDGETING IN AIRLINE INDUSTRY For profit organizations have shareholder's profit maximization as the main aim to pursue. Traditional managerial economics expects that all projects/investments having positive net present value (NPV) shall be initiated by
Litzenberger and Joy (1975) note that in a decentralized system, quantitative measures are more common for evaluating projects, but they also note that for larger projects there is some degree of centralization. This is the case with Stryker, where the most substantial projects are approved by the Board of Directors. Ang (1986) notes, however, that there can be agency problems where the interests of the division are misaligned with the
Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first." The equation to calculating the internal rate of return is a
When a range of options are presented to management, the capital budgeting process must be used to determine the costs and cash flows associated with each option. However, the capital budgeting process is only as valuable as the inputs and assumptions. If the assumptions are not grounded in reasonable analysis and quality research, the process will not yield a valuable result. If the numbers that are input into the
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