Capital Budgeting

Some industries are de-integrated such that the design of products and technologies occurs across the boundaries of firms and other legally separate entities.   There are important consequences for capital budgeting.   Write an essay explaining how capital budgeting practices may be affected when investments need to be coordinated and integrated at inter-firm and inter-organizational levels.   Take care to illustrate your answer by reference to relevant case studies and readings.

Capital expense is a cash outlay for projects or investments that are expected to produce a cash inflow or benefits over a period of time usually exceeding one year. Examples of projects include investments in property, plant, and equipment, research and development projects, large advertising campaigns, or any other project that requires a capital expenditure and generates an expected cash flow. They are potentially large and irreversible outlays.   As capital expenditures can be very large and have a significant impact on the financial performance of the firm, great importance is placed on project selection, which is so called capital budgeting. Potentially, there is a wide range of criteria for selecting projects and implementing them. Some shareholders may wish the firm to choose projects that will show immediate increase in cash inflows, and some may want to emphasise long-term growth with little importance on short termism. It would be quite difficult to satisfy the differing interests of all the shareholders. Therefore, the ultimate goal is to maximise present value of the firm and it is the reason for firms always carry out discounted cash flow (DCF) and net present vale (NPV) to convince investors.

Traditionally, firms have operated under mass production within its own enterprise, producing products and services at its lowest costs possible. By achieving it, firms aimed at expanding itself to become larger and larger in order to take advantage on the economies of scales.... [continues]

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