of Capital Budgeting
budgeting is the
process of analyzing potential investments for the firm. Capital budgeting decisions are probably the most important ones
financial managers must make. Capital budgeting decisions usually involves substantial expenditures on new assets. These decisions are particularly important because the firm loses much of its flexibility by locking into
projects and because capital budgeting decisions define the firm's strategic direction.
budgeting is the process of comparing the
costs and benefits
of a long term asset in order to
evaluate its value.
budgeting is in many senses no different than
the valuation of
any asset. It deals with the
comparison of cash
flows at different points in time.
When valuing financial
assets we were concerned with
their value, that
is the present value of all their future
cash flows. Capital
budgeting is the same, it is simply
the present valuing
of all future cash flows and the
comparison of those
flows against the costs
associated with them.
Do people actually use capital budgeting?
Capital Budgeting is perhaps the most useful
you will gain in
this course. Most of the major
you will make in your life can be
evaluated as a
capital budgeting problem. In fact
your very attendance
at this fine educational
occurred as the result of a capital
This is a process that most
out unconsciously, and when dealing
with small purchases
this is alright. In the corporate
world, the purchases
are rarely small.
of a set of rules has made is
possible for the
process of making purchasing
decisions to be