Capatial Budget Case

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  • Published : February 28, 2013
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The article on Capital Strategy and the Capital Budgeting Decision, brought to light some interesting points about selecting investment options that have a positive net present value. Although achieving a positive net value seems like a simple process, the article brings up other ways that will allow an organization to continue getting higher rates than the required rate for their respective industry. An important goal for organizations is to continue maintaining competitive advantages that would allow them to create barriers to entry in their industry. There are five major sources of barriers to entry; economies of scale, product differentiation, cost disadvantages, access to distribution channels and government policy. No matter what method chosen, the end goal is to create and maintain barriers to entry so that new companies will not enter the market and begin driving rates of return on investments down to the required return for the industry. It is not only important to maintain a company’s competitive advantages but to also to monitor them so when they are threatened, decisions can be made to strengthen them when they start to erode. These plans must be made quickly as potential entrants into the market will try to exploit them as a weakness and gain traction within the industry. A key realization is that any successful industry that enjoys great profits will naturally attract new entrants and competitors regardless of barriers. For this reason it is important that entrenched companies take full advantage of their experience and corporate culture, so they can in keep costs down and continue to differentiate their product from existing competitors and new entrants into the market.

In conclusion, although it is not an easy read, I found the article to be pretty interesting. It takes a basic approach to choosing investment options and fully explains it so the reader better understands what actions an organization must take to ensure it is using profits...
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