Capital budgeting is the process of analyzing alternative longterm investments and deciding which assets to acquire or sell. An objective for these decisions is to earn a satisfactory return on investment.
The process of evaluating and prioritizing capital investment opportunities is called capital budgeting. Capital budgeting relies heavily on estimates of future operation results. These estimates often involve a considerable degree of uncertainty and should be evaluated accordingly. In addition, many nonfinancial factors are taken into consideration.
Capital budgeting decisions have a major effect on the value of the firm and its shareholder wealth.
The efficiency of financial management if judged by the success in achieving the firm’s goal which is maximize shareholder wealth that management should endeavour to maximize the net present value of the expected future cash flows to the shareholders of the firm.
Net present value refers to the discounted sum of the expected net cash flows.
Capital budgeting is a multifaceted activity. There are several sequential stages in the process.
Cambridge University Presshttp://assets.cambridge.org/97805218/17820/sample/9780521817820ws.pdf John J. Wild & Ken W. Shaw, 2010, Managerial Accounting, McGrawHill Irwin Jan R. Williams, Susan F. Haka, Mark S. Bettner & Joseph V. Carcello, 14th edition 2008, Financial & Managerial Accounting, The Basis for Business Decisions, McGrawHill Irwin 




Report
http://elc.polyu.edu.hk/CILL/reports.htm

[ 2 ]. John J. Wild & Ken W. Shaw, 2010, Managerial Accounting, McGrawHill Irwin, Page392 [ 3 ]. Jan R. Williams, Susan F. Haka, Mark S. Bettner & Joseph V. Carcello, 14th edition 2008, Financial & Managerial Accounting, The Basis for Business Decisions, McGrawHill Irwin, Page1128
...Week 4 Discussion Question 1b
Introduction
Capitalbudgeting is one of the most crucial decisions the financial manager of any firm is faced with...Over the years the need for relevant information has inspired several studies that can assist firms to make better decisions. These models are assigned so that they make the best allocation of resources. Early research shows that methods such as payback model was more widely used which is basically just determining the length of time required for the firm to recover the outlay of cash and the return the project will generate. Other models just basically employed the concept of the time value of money. We have seen that more current models are attempting to include their analysis factors that might significantly affect the decision made by the manager (Cooper et.al, 2001).
Recent studies have shown that capitalbudgeting decisions are highly important and most times complex. There are several reasons associated with the use of capitalbudgeting. First, capital expenditures require the firms to outlay large sums of funds to initialize the project... Second, firms need to formulate ways that will generate and repay these funds that were initially outlayed. Finally, having a good sense of timing , when using this model is also very critical when making financial decisions. Several alternatives models are commonly used when...
...CapitalBudgeting
Financial Management FIN 534
Problem 23A
For the basecase scenario, what is the NPV of the plant to manufacture lightweight trucks?
Bauer Industries is an automobile manufacturer. Like any other company, the management team is considering making an investment and must consider all aspect before accepting a proposal. Bauer Industries must evaluate their proposal to build a plant that will manufacture lightweight trucks. The company has set a 12% cost of capital. IT is important that the proposal has positive NPV or it will not be a smart business move for Bauer Industries.
NPV is defined as the difference between the present value of its benefits and the present value of its cost. The formula used to calculate net present value is NPV=PV (benefits)PV (costs). Many companies consider the formula the golden rule for financial decision making. Decision makers look for positive NPV or the investment is not considered. In this case, the NPV of the plant to manufacture lightweight trucks is positive.
NPV=150 x 36 x 1.12(11112x9)+481.12x10=57.3 million
Problem 23B
What is the NPV of this project if revenues are 10% higher than forecast? What is the NPV if revenues are 10% lower than forecast?
Sensitivity analysis is another great capitalbudgeting tool to use when evaluating investments or making business decisions within a firm or company. If a company use the...
...CapitalBudgeting Strategies
University of Phoenix
Strategic Financial Management
FIN 486
CapitalBudgeting Strategies
Week Four of Strategic Financial Management discusses the chosen provided information for the proposal that concerns building a new factory and includes the incremental cash flows needed for the net present value, (NPV) analysis. The incremental cash flows identifies sales of $3 million a year that equals an increase in gross margin of $150,000 given a 5% gross margin and initial investment of $10 million that includes the cost of building the new factory (Gitman, 2009). The savage value at the end of the project life equals $14 million.
Given a 10% weighted average cost of capital, table 1 shows the computed NPV for the project.
Table 1
Year  Cash Flow  PV Factor  Present Value 
0  (10,000,000)  1.0000  (10,000,000) 
1  150,000  0.9091  136,364 
2  150,000  0.8264  123,967 
3  150,000  0.7513  112,697 
4  150,000  0.6830  102,452 
5  150,000  0.6209  93,138 
6  150,000  0.5645  84,671 
7  150,000  0.5132  76,974 
8  150,000  0.4665  69,976 
9  150,000  0.4241  63,615 
10  14,150,000  0.3855 ...
...1
CapitalBudgeting Problem
MBA612, Dr. Schieuer
By: Dean Anderson, Terry Sutton,
Sawan Tamang, Karuna Mishra,
2
CapitalBudgeting Process: Capitalbudgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures (Sullivan & Sheffrin, 2003). The capitalbudgeting process involves three basic steps:
1. Identify potential investments
2. Evaluate the set of opportunities, choosing those that create shareholder value, prioritize
3. Implement and monitor the investment projects selected
The capitalbudgeting process begins with an idea and ends with implementation and monitoring. In this particular problem we are focusing on the second step in the process: analyzing the merits of the investment proposal to expand and simultaneously replace old equipment.
There are analytical tools that weigh the merits of investment projects on several dimensions. To decide which investments to undertake, managers need an analytical tool that: (1) is easy to apply and explain to nonfinancial personnel; (2) focuses on cash flow, not...
...CapitalBudgeting Decision Process
1. Introduction
The maximization of shareholder wealth can be achieved through dividend policy and increasing share price of the mark value. In order to derive more profits, our company shall invest potential investments which always cover a number of years. Those investments involve substantial initial outlay at the outset and the process. The management is responsible to participate in the process of planning, analyzing, evaluating, selecting and making decisions to allocate the limited resource to those investments. This is called capitalbudgeting decision process. Budgeting acts as an important managerial tool in practice. It is budget for the major capital investment such as purchase of land and building, plant and machine, investing new product or market. In modern competing environment, the company shall go ahead to make those investments in order to survive and profitability. A good evidence is Apple which globally introduced iPhone and acted as a leading market position. Denzil & Antony (2007) stated that “Those decisions shall take account of the amount, timing and associated risk of expected company cash flow”. Therefore, Capitalbudgeting decision process is within the prospective of financial management.
2. The Aims of Financial Management
Finance management generally embraces...
...CapitalBudgeting Technique
MGMT300404 Financial Management
CapitalBudgeting Techniques
Capitalbudgeting is one of the most important decisions that face a financial manager. There are many techniques that they can use to facilitate the decision of whether a project or investment is worthy of consideration. The four that will be covered within this paper are Payback Rule, Profitability Index, IRR and NPV. Each method has its strength and weaknesses and they will be examined to determine which method is superior to the rest.
The first method to look at is Payback Rule. This rule is designed to show how long it will take to recover the cost of investment for the firm. This investment rule specifies a certain number of periods as a cutoff for determining whether to invest in a project. All investment projects where the initial investment cannot be recovered in specified cutoff period are unacceptable under this rule no matter what they provide past the cutoff. It is the easiest of all the methods to use and understand that will be reviewed. An example of this method is list in table 1. Now if we look at this table we find that if we use two periods as the cutoff then only Project B would be accepted for Project A does break even until year three. The problem with this method is that Project B breaks even but does not provide any income for the firm where Project A would...
...Application of Monte Carlo Simulation in CapitalBudgeting
 
by Prit, Aug 2, 2008 
The usefulness of Monte carlo Simulation in CapitalBudgeting and the processes involved in Monte Carlo Simulation. It also 
highlights the advantages in some situation compared to other deterministic models where uncertainty is the norm. 
[pic] 
Capitalbudgeting is an important area in Financial Management. CapitalBudgeting means the investment in capital projects and
identify the projects, which has the highest value adding to the company at the cost of capital. It uses net present value of 
future cash flows discounted at the appropriate cost of capital and compares it with initial investment and to see whether it 
is a positive net present value. If the present value is less than the initial investment then the project is rejected. That 
is the net present value is dependent on future cash flows. 
In a deterministic model the cash flows are forecasted as a single figure and scenarios are considered...
...Capitalbudgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures.[1]
Many formal methods are used in capitalbudgeting, including the techniques such as
* Accounting rate of return
* Payback period
* Net present value
* Profitability index
* Internal rate of return
* Modified internal rate of return
* Equivalent annuity
* Real options valuation
These methods use the incremental cash flows from each potential investment, or project. Techniques based on accounting earnings and accounting rules are sometimes used  though economists consider this to be improper  such as the accounting rate of return, and "return on investment." Simplified and hybrid methods are used as well, such as payback period and discounted payback period.
Contents [hide] * 1 Net present value * 2 CapitalBudgeting Definition * 3 Internal rate of return * 4 Equivalent annuity method * 5 Real options * 6 Ranked Projects * 7 Funding Sources * 8 Need For CapitalBudgeting * 9 External links and references 
Net present value[edit]
Main article: Net present value...