Capital Budgeting Decision Making Tools. Essay

2645 words - 11 pages

Capital Budgeting, the decision making process regarding assets, resources, principal and investments, and how they are to be utilitized within a company. "Capital investment decisions comprise the long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders" ( budgeting is essential in marketing decisions, for any business. "Decisions on investment, which take time to mature, have to be based on the returns which that investment will make. Unless the project is for social reasons only, if the investment is unprofitable in the long run, it is unwise to invest in it now. Often, it would be good to know what the present value of the future investment is, or how long it will take to mature (give returns)". It could be much more profitable putting the planned investment money in the bank in order to earn interest, or to invest it. Typical Capital budget decisions include the decision to build or invest. A smaller business manager may need "to evaluate whether to spend more on advertising or increase the sales force, although it is difficult to measure the sales to advertising ratio" ( The following methods will evaluate Capital budgeting:- Initial Investment Outlay includes the cash needed to purchase new equipment or to construct a new building, less any cash proceeds from the disposal of the replaced equipment. "The initial outlay also includes any additional working capital related to the new equipment. Only changes that occur at the beginning of the project are included as part of the initial investment outlay" ( Cash benefits can be described as savings from operations, minus taxes and any change in working capital, which includes the net cash generated from the sale of any assets and the effects of taxes; this is referred to as terminal cash flow.- The Capital Budgeting Process includes investing in assets or a project that will amount in value to a significant portion of the total assets of the organization. "Capital expenditure decisions, therefore, form a foundation for the future profitability of a company" (Duncan Williamson, 2005) The steps to the capital budgeting process are: establishing the project, identify and consider alternatives, the appraisal (number crunching), analyze the feasibility, plan, and monitor and audit the project.- The expenses that the project requires must be controlled, using a cost benefit, approach such as "the payback, rate of return, net present value, internal rate of return and the profitability index, there are other techniques of course; but the technique to be used will depend on a range of things, including the knowledge and sophistication of the management of the organization, the availability of computers and the size and complexity of the project under review" (Duncan Williamson, 2005).- Company management's experience...

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