Large Cost Associated With Capital Projects

Decent Essays

Whenever an organization is expanding, there are several major complexities which can arise. As defined by Investopedia, “A capital project is a lengthy investment used to build, add or improve on a project. It is any task that requires the use of significant capital, both financial and labor, to start and finish. Capital projects are defined by their large scale and larger cost relative to other investments that involve less planning and resources.” (Investopedia: Capital Project) Obviously the most common complexity with expansion via capital projects would be large cost associated with the expansion. In order for an organization to expand, they will need additional finances and resources in order to fund the expansion. The large …show more content…

To address the issue of difficulty entering the new market, during the timeframe in which profits are being set aside to fund the future expansion, detailed research and analysis should be completed on: the market, consumers, competitors, and the competitor’s products. This analysis will allow the organization to review whether the expansion should occur and whether the benefits of entering the market outweigh the risks being taken.
Inherently, the interests of stockholders and managers are different. Stockholders wish to maximize profits for the company and are really only concerned with the bottom-line of the organization. As managers are mainly concerned with the day to day operation of the company and naturally have an invested interest to have the highest income they can, which in return increases expense and therefore reduces profits. However, there are a few ways that the company could create a convergence between the interest of the stockholders and the managers. One such way would be to compensate management with yearly financial bonuses based off the company’s performance and profitability. By doing this, it creates a win-win environment where if the company’s performance and profitability increases than management will receive an increase in income. Furthermore, this becomes an endless cycle where the manager’s increase in income becomes the driving force behind management’s

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