Capital Budgeting
Deciding if it is time to buy a new car can certainly be influenced by the amount of money that will be tied up for the next several years. For the average person, it could be a very precarious decision, especially with the volatility of the economy. There are many factors to consider when making major purchases such as time, money, resale value, and overall necessity. Whether it is a personal budget or a budget for a multi-million dollar company, trying to predict what will happen in the future will always have it’s risks. However, it is an important aspect of a company’s survival and the overall success in the future.
As stated in Corporate Finance by Ehrhardt and Brigham, capital implies long-term assets that are utilized in production and a budget is a plan that outlines anticipated expenditures during a coming period (p 381). So, when the two words are combined to imply one definition, the term capital budget is a synopsis of planned investments of assets that will remain for more than a year. Additionally, capital budgeting is the process as a whole of analyzing projects and determining which ones to acknowledge and then incorporate in the capital budget (Ehrhardt & Brigham, 2011, p. 381).
The capital budgeting practice includes forecasting and identifying cash flows, performing scenario and sensitivity analysis, and applying capital budgeting tools (Kwok & Rabe, 2010). This process is essentially where the financial potential for a possible investment or multiple investments is evaluated. In the chance that there are several potential opportunities for investment, each investment must be analyzed and compared against the other possibilities in order to figure out which opportunity has the pote...
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Works Cited
Ehrhardt, M., & Brigham, E. (2011). The Cost of Capital. Corporate Finance (p. 342-343). Mason, OH: Cengage Learning.
Keshav, A. (2009). Need And Importance Of Capital Budgeting. . Retrieved May 13, 2014, from http://accountlearning.blogspot.com/2011/07/need-and-importance-of-capital.html
Kwok, J. S., & Rabe, E. C. (2010). Conflict between doing well and doing good? Capital budgeting case study - Coors. Journal of Business Case Studies, 6(6), 123-130. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/818384065?accountid=40195
Paden, R. (2014). Components of a Capital Budget. Houston Chronicle.
Sullivan, Arthur, & Sheffrin, Steven (2005). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 375.
The 10 Biggest Tech Failures of the Last Decade. (2009, May 14). TIME.
Capital Budgeting encourages managers to accurately manage and control their capital expenditure. By providing powerful reporting and analysis, managers can take control of their budgets.
Brue, S. L., Flynn, S. M., & McConnell, C. R. (2011).Economics principles, problems and policies. (19 ed.). New
McManus, Doyle. “Drawing Budget Battle Lines.” Editorial. Los Angeles Times. Los Angeles Times, 14 Apr. 2011. Web. 5 June 2011. .
A long-term capital investment are classified as an investment that is longer than a year. Capital investments are necessary for ongoing business activities Capital budgeting is an estimate at the time, “the budgeting process is subject to purposeful manipulation, as well as judgmental errors.” “Considering the significant size and long duration of these investments, inappropriate capital investment decisions may have serious financial consequences for a business.” (Regis University, n.d. p.2 )
The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred. The Budget Process Budgetary planning may differ between organizations. Single-period budgets and rolling budgets have methodologies that provide advantages and disadvantages that may make one budget time frame better than another. A single period may require less time in planning during a fiscal year, but is less accurate than a rolling budget that is continuously planned on a repetitive basis. In either case, budgets are planned in advance in order for a company to operate profitably, and less so to have "actual results equal budgeted results."
In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20bn dollars in equity and $80bn in debt is said to be 20% equity financed and 80% debt financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage.
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
This is a budgeting process that requires managers to prepare budgets each period from ground zero for all the operations. Each period budget can feed off previous approved period budget. Under this method every activity must be justified and cost explained that generates revenue for a company. All costs are justified each time a budget is completed.
The choice of appropriate source of fund for capital structure is one of the major policy decisions taken by a firm.(Kumar, Anjum & Nayyar,2012) The
Tragakes, E. (2012). Economics for the IB diploma (2nd ed.). Cambridge, UK: Cambridge University Press.
O'Sullivan, A., & Sheffrin, S. (2005). Economics. Upper Saddle River, New Jersey: Pearson Prentice Hall.
e budget is a document which allows an organisation to estimate income and expenditure over a certain time period usually the previous year and altered to accommodate any foreseeable changes. Many organisations, individuals plan their financial activities by preparing budgets. For an organisation to be successful, its crucial to plan its financial activities in the future well in advance. It is important to estimate its income and expenditures (Ibid, 2005) using data from past events and allow for anticipated future trends.
a. 1. What sources of capital should be included when you estimate Harry Davis’s weighted average cost of capital (WACC)?
There are several aspects that need to be considered when creating a budget for your business. First of all, why do you need one and what are the advantages? The U.S. Small Business Administration suggests that a budget can be used to indicate some of the following: funds needed for labor and/or materials, for a new business, total start-up costs, costs of operations, the revenues necessary to support the business, and a realistic estimate of expected profits. If you are beginning a start-up business, a budget may also be requested by banks or other investors before they are willing to help finance you. Without any profit planning, you nor your employees will know exactly what needs to be done and what is expected of you to keep the business afloat. (How To Start a Business Budget)
Sullivan, A., & Steven M., (2003). Economics: Principles in action. Upper Saddle River, New Jersey : Pearson Prentice Hal