Capital Budgeting: Financial Appraisal of Investment Projects

Capital Budgeting: Financial Appraisal of Investment Projects

Capital Budgeting: Financial Appraisal of Investment Projects

Capital Budgeting: Financial Appraisal of Investment Projects

Synopsis

This book for advanced students and professionals in management and finance explains the financial appraisal of capital budgeting projects. It develops basic concepts, principles and techniques and applies them to case studies in forestry, property and international investments. Resource constraints are introduced to the capital budgeting decisions with a variety of worked examples using linear programming techniques. All calculations are extensively supported by Excel workbooks on the Web, and end of chapter questions.

Excerpt

Financial management is largely concerned with financing, dividend and investment decisions of the firm with some overall goal in mind. Corporate finance theory has developed around a goal of maximizing the market value of the firm to its shareholders. This is also known as shareholder wealth maximization. Although various objectives or goals are possible in the field of finance, the most widely accepted objective for the firm is to maximize the value of the firm to its owners.

Financing decisions deal with the firm's optimal capital structure in terms of debt and equity. Dividend decisions relate to the form in which returns generated by the firm are passed on to equity-holders. Investment decisions deal with the way funds raised in financial markets are employed in productive activities to achieve the firm's overall goal; in other words, how much should be invested and what assets should be invested in. Throughout this book it is assumed that the objective of the investment or capital budgeting decision is to maximize the market value of the firm to its shareholders. The relationship between the firm's overall goal, financial management and capital budgeting is depicted in Figure 1.1. This self-explanatory chart helps the reader to easily visualize and retain a picture of the capital budgeting function within the broader perspective of corporate finance.

Funds are invested in both short-term and long-term assets. Capital budgeting is primarily concerned with sizable investments in long-term assets. These assets may be tangible items such as property, plant or equipment or intangible ones such as new technology, patents or trademarks. Investments in processes such as research, design, development and testing - through which new technology and new products are created - may also be viewed as investments in intangible assets.

Irrespective of whether the investments are in tangible or intangible assets, a capital investment project can be distinguished from recurrent expenditures by two features. One is that such projects are significantly large. The other is that they are generally long-lived projects with their benefits or cash flows spreading over many years.

Sizable, long-term investments in tangible or intangible assets have long-term consequences. An investment today will determine the firm's strategic position many years hence. These investments also have a considerable impact on the organization's future cash flows and the risk associated with those cash flows. Capital budgeting decisions thus have a longrange impact on the firm's performance and they are critical to the firm's success or failure.

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.