Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the firm's goal of maximizing owner wealth. A firm using capital budgeting, their goal is to see if there fixed income will cover itself for profit. Fixed incomes are things such as land, plant and equipment. When a firm using a machine to produce its good or service. They most of the time what the machine to produce the amount that they paid for the machine and more. The capital expenditure is the outlay of fund that a firm expects to produce and benefit with in a one year.
The Capital Budgeting Process When approaching the problem of trying to the measure capital budgeting. The first step in capital budgeting is the Proposal generation. The proposals are made at all levels within a business organization and are reviewed by finance personal. The Second step in the process in the review and analysis. The formal review and analysis is performed to assess the appropriateness of proposals and evaluate their economic viability. Once the analysis is complete, a summary report is summated to decision makers. The third step in the process will be the Decision making. Firms typically delegate capital expenditure decision making on the basis of dollar limits. The board of directors must authorize expenditures beyond a certain amount. Often plant manager are given authority to make decisions necessary to keep the production line is moving.
The forth step in the capital budgeting process is the Implementation. This process involves expenditures that come from projects implemented. Expenditures for a large project often in these phases. The final step in the process will be the follow-up stage. Results are monitored and tell the actual outcomes.
Sunk cost and Opportunity Cost
Doing the time of estimating the relevant cash flows associated with a proposed capital expenditure, the firm must recognize any sunk cost and
Cited: Ansari, Shahid. The Capital Budgeting Process. New York: McGraw-Hill/Irwin; 1 edition, 2000. Boness, A J. Capital budgeting;: The public and private sectors (New directions in management and economics). Boston: Boness, 1972. Seitz, Neil., and Mitch E. Ellison. Capital Budgeting and Long-Term Financing Decisions. Houston: South-Western College Pub; 4 edition, 2004. McCracken, M. E. (2005). Capital budgeting. Retrieved July 18, 2006 from http://teachmefinance.com/capitalbudgeting.html