Capital Budgeting Paper (Essay Sample)
The capital budgeting process is important, but is it the most important process that a firm undertakes. Why or why not? If you believe there is a more important process, what is it and why do you think it is more important? Also Brigham and Ehrhardt (2014) define capital budgeting as the whole process of analyzing projects and deciding whether they should be included in the capital budget. This process is of fundamental importance to the success or failure of the firm as the fixed asset investment decisions chart the course of a company for many years into the future.
Conceptually, the capital budgeting process is identical to the decision process used by individuals making investment decisions. These steps are involved:
1. Estimate the cash flows—interest and maturity value or dividends in the case of bonds and stocks, operating cash flows in the case of capital projects.
2. Assess the riskiness of the cash flows.
3. Determine the appropriate discount rate, based on the riskiness of the cash flows and the general level of interest rates. This is called the project cost of capital in capital budgeting.
4. Evaluate the cash flows.
Brigham and Ehrhardt, (2014) Financial Management w/access, South-Western Cengage Learning, 14th edition 2014
Capital budgeting is a process used by firms in evaluating the amount significance of various potential expenditures. The expenditures are evaluated according to their future accounting profit. It is concerned with the formal process of acquisition and investment of capital. Capital budgeting is concerned with the justification of capital expenditures.
Capital budgeting is an important process to a firm. The type of budgeting involves far future implication of a firm, thus influencing its risk complexion. It gives an implication on the firm’s future (Brigham & Ehrhardt, 2013). This ensures the right expenditure is allocated the right amount of capital. Capital budgeting also involves commitment of large amount of capital. This encourages the firm to look for extra sources of capital. This in a way builds the firm’s capital.
In addition to that, capital budgeting ensures some future for the firm. This minimizes potential failures of the firm. It maintains a certain goal that the firm will be always aiming at. Mostly this aspect makes the process be the most important (Grob, 2013). Since capital budgeting mainly focuses on cash flows, it assists the firm in managing its capital. This includes looking for more capital sources. Many firms fail because of too much or too little capital (Brigham & Ehrhardt, 2013). The capital imbalances catered for during capital budgeting process. The firm’s ability to fully manage its capital and balance the capital is a product of capital budgeting. This too makes the process most crucial to the firm...
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