Capital Budgeting

Essay by wyldthang33University, Master'sA, April 2008

download word file, 8 pages 0.0

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 firm's 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 capital budgeting there are some steps to follow. The first step in capital budgeting is the proposal generation. Finance personal review the proposals made at all levels within a business organization.

The Second step in the process in the review and analysis. Performing the formal review and analysis to assess the appropriateness of proposals and evaluate their economic viability. Creating a summary report for the decision makers once the analysis is complete is a standard procedure. The third step in the process will be the decision making. Firms typically delegate capital expenditure decision-making based on dollar limits. The board of directors must authorize expenditures beyond a certain amount. Many give plant managers the authority to make decisions necessary to keep the production line is moving. The forth step in the capital budgeting process is the implementation. This process involves expenditures that come from projects implemented, expenditures for a large project often in these phases. The final step in the process will be the follow-up stage. Monitoring the results will tell the actual outcomes. (Ryan & Ryan, 2002)Many techniques can...