2549 Words11 Pages

Capital Budgeting
One of the most important decisions a financial manager can make involves capital budgeting. Capital budgeting is used to determine which fixed assets should be purchased. The purchasing of fixed assets is a form of a long-term investment. Allocating funds in the capital account is a form of capital budgeting. A financial manager will determine if the purchase of a capital asset or fixed asset is worth more over that assets life then it is for the cost to purchase it. In other words, they make sure that the asset would get the amount it cost plus a profit in return.
Financial managers cannot seem to agree on a specific method that works better than the other when it comes to estimating and budgeting. Even in the*…show more content…*

There is no guarantee that the future estimates will reflect the actual cash flows. Errors are a common occurrence in forecasting, estimating and budgeting. The forecasting risk that there are errors that will lead to misinformation, causing the wrong decisions to be made on a proposal. The Payback Rule When talking about “payback,” it is referring to the amount of time it takes to regain the amount it cost a business to pay for the investment. In other words, how many years does it take to generate enough cash flows from the investment to cover its costs. It can also be seen as the amount of time it takes for an investment to “breakeven.” The amount of time is a predetermined amount, and that amount is what is factored in when determining if the investment is a good investment. For example, if a company decides they want to invest in a capital asset that would take less than five years to payback, and after calculating the cash flows and determine it will take only three years to payback or generate enough from the investment, than the investment is a good investment. There is no set rule when determining how much time an investment should have for the payback. That is up to the discretion of the financial managers. One issue with the payback method is that it ignores time value. When estimating the cash flows and the payback, it is good to project over the entire allotted time span on what the cash flows would be.

There is no guarantee that the future estimates will reflect the actual cash flows. Errors are a common occurrence in forecasting, estimating and budgeting. The forecasting risk that there are errors that will lead to misinformation, causing the wrong decisions to be made on a proposal. The Payback Rule When talking about “payback,” it is referring to the amount of time it takes to regain the amount it cost a business to pay for the investment. In other words, how many years does it take to generate enough cash flows from the investment to cover its costs. It can also be seen as the amount of time it takes for an investment to “breakeven.” The amount of time is a predetermined amount, and that amount is what is factored in when determining if the investment is a good investment. For example, if a company decides they want to invest in a capital asset that would take less than five years to payback, and after calculating the cash flows and determine it will take only three years to payback or generate enough from the investment, than the investment is a good investment. There is no set rule when determining how much time an investment should have for the payback. That is up to the discretion of the financial managers. One issue with the payback method is that it ignores time value. When estimating the cash flows and the payback, it is good to project over the entire allotted time span on what the cash flows would be.

Related

## Capital Budgeting

1414 Words | 6 PagesWeek 4 Discussion Question 1b Introduction Capital budgeting is one of the most crucial decisions the financial manager of any firm is faced with...Over the years the need for relevant information has inspired several studies that can assist firms to make better decisions. These models are assigned so that they make the best allocation of resources. Early research shows that methods such as payback model was more widely used which is basically just determining the length of time required for the

## Capital Budgeting

2563 Words | 11 Pagesgeting1.0 INTRODUCTION Capital budgeting plays an important role in a firm’s financial management, the selection of a project is of great importance because it required a very large capital expenditure which will have a significant impact on the financial performance of the firm. Therefore a mistake in capital budgeting process by a firm will cost them a long period of time. Capital budgeting can be defined or seen as a designed process which involves management of available resources to select

## Capital Budget : Capital Budgeting Essay

1838 Words | 8 Pagesproject’s potential cost and benefit, this analysis is known as capital budgeting. Authors Besley & Brigham of the text book CFIN 4, 4th Edition explain, “Thus, the capital budget is an outline of planned expenditures on fixed assets, and capital budgeting is the process of analyzing projects and deciding (1) which are acceptable investments and (2) which should actually be purchased.” (Besley & Brigham, 2015, pg. 145). Creating a capital budget and forecast that is as close as possible to the realized

## Capital Budgeting Techniques

4020 Words | 17 PagesABSTRACT This report describes capital budgeting techniques such as NPV (The NPV of an investment is the difference between its market value and its cost, IRR (The IRR is the discount rate that makes the estimated NPV of an investment equal to zero. PAYBACK (The payback period is the length of time until the sum of an investment’s cash flows equals its cost), discounted payback period (The discounted payback period is the length of time until the sum of an investment’s discounted cash flows equals

## Capital Budgeting Strategies

841 Words | 4 PagesCapital Budgeting Strategies University of Phoenix Strategic Financial Management FIN 486 Capital Budgeting Strategies Week Four of Strategic Financial Management discusses the chosen provided information for the proposal that concerns building a new factory and includes the incremental cash flows needed for the net present value, (NPV) analysis. The incremental cash flows identifies sales of $3 million a year that equals an increase in gross margin of $150,000 given a 5% gross margin and

## Capital Budgeting Essay

1391 Words | 6 PagesCapital Budgeting Essay (Derived from Chapter 17: Long-Term Investment Analysis) Title: The Lorie-Savage Problem BUS 505 – Multinational Economics of Technology Table of Contents 1.0 Introduction – Lorie-Savage Problem 3 1.1 Thesis Statement 3 2.0 Supporting Research 4 3.0 Conclusions and Recommendations 6 References 7 1.0 Introduction – Lorie-Savage Problem The Lorie-Savage problem is a problem introduced in 1955 that addresses the issue in how to allocate capital (or resources)

## Capital Budgeting Decision : An Argument

949 Words | 4 Pagesa growing prosperous organization. Capital budgeting decision is considered to be the most important and crucial decision among the four decisions mentioned above because it, to a great extent, influences the survival, growth and value of a business enterprise. In the words of Porwal (1976), “Capital budgeting is one of the important vehicles to achieve objectives of a business concern”. Van Horne (1994) provides an argument according to which capital budgeting decision is the most important of the

## Capital Budgeting Is An Investment Appraisal Essay

2131 Words | 9 PagesCapital budgeting is an investment appraisal, and is the single most important decision made by a company’s finance and exec team. It is the planning process used to determine whether an organization 's long term venture(s) are worth the investment through the firm 's debt, equity or retained earnings. One of the primary goals is to increase the value of the firm to the shareholders. “The process of capital budgeting involves analyzing, evaluating and deciding whether resources should be allocated

## The Capital Budgeting Project : Starbucks Essay

995 Words | 4 Pagesmanufacturing plant in Augusta, Georgia. To evaluate whether the project would be profitable and should be accepted, a capital budgeting model that computes key metrics was constructed and the results were analyzed. II. Description of Proposed Capital Budgeting Project Currently, Starbucks is considering making an investment in a new manufacturing plant in Augusta, GA. The capital budgeting project requires an initial investment outlay of $ 40 million and is expected to general annual cash flows of 5.200

## Capital Budgeting Decision Process

2039 Words | 9 PagesCapital Budgeting Decision Process 1. Introduction The maximization of shareholder wealth can be achieved through dividend policy and increasing share price of the mark value. In order to derive more profits, our company shall invest potential investments which always cover a number of years. Those investments involve substantial initial outlay at the outset and the process. The management is responsible to participate in the process of planning, analyzing, evaluating, selecting

### Capital Budgeting

1414 Words | 6 Pages### Capital Budgeting

2563 Words | 11 Pages### Capital Budget : Capital Budgeting Essay

1838 Words | 8 Pages### Capital Budgeting Techniques

4020 Words | 17 Pages### Capital Budgeting Strategies

841 Words | 4 Pages### Capital Budgeting Essay

1391 Words | 6 Pages### Capital Budgeting Decision : An Argument

949 Words | 4 Pages### Capital Budgeting Is An Investment Appraisal Essay

2131 Words | 9 Pages### The Capital Budgeting Project : Starbucks Essay

995 Words | 4 Pages### Capital Budgeting Decision Process

2039 Words | 9 Pages