“One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery and so on, in anticipation of being able to earn an income greater than the funds committed”. (Investment Appraisal sheet). A Capital Budgeting Process essentially defined as, “the process by which the financial manager decides whether to invest in specific capital projects or assets” (Capital Budgeting, Decision Process, Procedure, definition) is put in place within companies in order to sift through and make decisions regarding viable major investments. The various stages of the Capital Budgeting Process are (a) Forecasting investment decisions; (b) Identifying projects to meet needs; (c) Appraising the investments; (d) Selecting the best alternatives; (e) Making the expenditure; (f) Monitoring projects. (Investment Appraisal sheet). There are also various components of the process which include, the initial investment outlay, which is the initial cash outflow on the purchase of an asset less the net cash proceeds from the disposal of the replaced asset; Net cash savings or benefits or savings from operations; Terminal cash flow; and the NPV technique. (Capital Budgeting, Decision Process, Procedure, definition). Management accounting uses the Net Present Value (NPV) technique, which in simple terms practices an explicit comparison of the returns from a specific project with the relevant opportunity cost of capital, to appraise and manage investment decisions. NPV is an indicator of how much value an investment adds to the firm. (Net Present Value, 2009)
If companies are to be undertaking successful projects, there needs to be an emphasis on qualitative measures as well. The most relevant among them for firms is the competitive advantage that they can gain from the project. To build competitive advantage a firm first... [continues]
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