The Fundamentals Of Capital Budgeting Essay example

The Fundamentals Of Capital Budgeting Essay example

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Chapter 10 focuses on the fundamentals of capital budgeting and why these decisions are the most important investment decisions made by the firm. The overall goal of capital budgeting decisions is to increase the value of the firm. With this objective, the financial department must strategically select which investments will create the most value for the firm. These capital investments are essentially the primary source of revenue generation for firms.
These capital investments are essentially investment projects with three different classifications: independent, mutually exclusive, and contingent projects. Independent projects decisions do not affect other projects. Mutually exclusive projects are decisions based on the best possible project precluding all other options. Contingent projects are accepted projects contingent on the acceptance of other projects. There are 2 classifications of contingent projects: mandatory and optional, both of classifications speak for themselves.
When making a capital budgeting decision the determining factor is whether the firm’s value is maximizing based on the decision. In order for this to happen, the benefits must exceed the costs. This is known as the net present value. The decision is based on whether the net present value (NPV) is positive or negative. If positive, the benefits exceed the costs and will maximize wealth of the firm. If negative, costs exceed the benefits and decrease the value of the firm. Practically, if the NPV is positive, it is appropriate to accept the budgeting decision. If the NPV is negative, management should decline the budgeting decision.
The payback period is another method used in capital decision-making. This method computes the length of time it will ta...


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...use with little starting money I must rationalize which website has the most views. The same goes for department stores. If I wish to have my swimsuits at certain department stores I must rationalize by selecting stores with the best locations, revenue, traffic, etc.
As opposed to financial assets, real assets will be trickier to value because less information exists. I wish to open my own retail shop in Huntington Beach where swimsuits are normal everyday clothing options. If I were to purchase a small shack at a certain price (that is the initial cost of the project). Next, I would hire interior designers to fix up the place (cash outflow). After years of establishing this Huntington Beach location, buyers wish to purchase this location from me, offering me X amount of money (cash inflow). The cash inflows minus the cost outflows will determine my company’s NPV.

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