A Research On Capital Budgeting

846 Words4 Pages
Regardless of the industry, any organization that is navigating their operations without observing all directions is putting themselves in an enormously risky situation since for a company to succeed they must be constantly aware of their financial situation. Capital budgeting is the process of planning expenditures that generate cash flow and that are also expected to go beyond more than a year. Any organization that is taking on a new project, or making a new investment, needs to determine whether this will be the most efficient use of their funds and whether this course of action will lead to an increase of wealth for the organization. Throughout this process, several principles should be kept in the forefront of the decision makers’ mind because they can serve as a form of guidance to avoid losing focus as they establish their budgeting plans. The four principles evaluated, and their importance, consequences, and benefits will be determined to understand their significance in this process better. From the perspective of the investors, wealth maximization is of the highest importance because an increase in profit not always correlated to an increase in cash flow. For instance, an organization can have a decrease in total revenue, yet still report an increase in profit, by cutting back their internal costs to compensate for the drop in revenue. If an organization is unable to generate cash flow, there will be no return for their investors however through financial
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