Capital Budgeting: Theory & Application

Abstract:     
The Capital budgeting process is an important tool to make decision When a new investments or new projects are considered weather to proceed ahead with or not. Also a toll could be used to prioritize investments based on their returns (increase owner equity)

In most of the times, the project’s returns, life time, cash flows in & cash flows out are used to determine if the project’s returns are acceptable or even better than management min. accepted returns (based on market benchmark).

Why we need Capital Budgeting:
• In case we want to introduce new product to our products family.
• If we are planning to increase production by adding new machine.
• Incase we are planning to enter new markets.
• If we are planning to replace old machinery with new automatic machinery.
• In case we want to our source parts of components.

Ideally, all business units would be attracted to any market opportunity or projects which will increase the owner’s equity. However, due to limitations of the “ new projects “ available capital in adjacent time, managers needs to use capital budgeting techniques to find out which projects will achieve the best return over an applicable period of time.

Number of Pages in PDF File: 23

Keywords: capital budgeting

working papers series