Capital Budgeting
- Date: April 08, 2008
- Level: University, Master's
- Grade: A
- Length: 8 pages (2116 words)
- Essay rating:
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capital budgeting process, capital expenditure decision, fixed incomes, proposal generation, economic viability, important decisions, ...term investments, plant managers, dollar limits, business organization, outlay, appropriateness, fixed income, decision makers, expenditures, shareholders, board of directors, proposals, implementation, finance
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Subject > Businesss Research Papers > Accounting
Capital budgeting is one of the most important decisions that face a financial manager. Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the firms goal of maximizing owner wealth. A firm using capital budgeting has a goal to see if the fixed income will cover itself for profit. Fixed incomes are things such as land, plant, and equipment. When a firm uses a machine to produce its good or service, they want the machine to produce the amount that they paid for the machine and more. The capital expenditure is the outlay of cash that is expected to produce income over a period exceeding one year.
When approaching the problem of trying to measure ...
... shareholder return requirement is another key element of the modern approach.
Shareholders want managers to invest only if the expected rate of return exceeds the cost of capital. Because of this, managers cannot ignore the cost of capital imperative and indeed their focus should be on returns over and above the cost of capital. This has given rise to a growing number of companies using EVA in manager compensation packages, especially since it resolves agency problems and generates incentives for managers to focus on increasing shareholder wealth. It is hoped that this discussion on capital budgeting and investing will have served to better illustrate the scope of this often-complex subject.
REFERENCES: Investopedia. (2007). Profitability Index. Retrieved December
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