Capital Budgeting
Capital budgeting Making decisions having significant future benefits or costs for various entities and their stakeholders.
Capital budgeting is the backbone of financial economics. Related topics in financial economics include: the time value of money, the meaning of net-present value, accounting concepts consistent with present-value calculations, discount rates, and option valuation techniques.
In the public sector, the term is often exclusively associated with infrastructure investments -- plant and equipment. It is more properly associated with all policy choices that have significant, long-term consequences: especially decisions about missions, programs, products, processes, or procedures.
There are standard solutions to several kinds of capital-budgeting problems: make or buy decisions, investment in working capital (especially inventories) decisions, maintenance-level decisions, project selection, the choice of mutually exclusive investments, and investments in plant with fluctuating rates of production. However, the same basic calculus of benefits and costs is supposed to guide all classes policy choices with long-term consequences.
Financial Theory
Financial theory teaches that, in the presence of a capital market where funds can be obtained at a price, welfare will be maximized by the implementation of all policy choices that generate positive net-present values. This means, in part, that the timing of benefits and costs is generally of no importance. Most students of financial economics further assert that capital budgeting decisions should also be independent of the source of financing -- value will be the same regardless of whether it is financed with debt, equity or taxes.
Taken together these two assertions imply that all capital budgeting decisions should be governed by cost-benefit analysis, which says: do it whenever benefits exceed costs.
Budget Processes
The institutional arrangements through which capital
Capital budgeting is the backbone of financial economics. Related topics in financial economics include: the time value of money, the meaning of net-present value, accounting concepts consistent with present-value calculations, discount rates, and option valuation techniques.
In the public sector, the term is often exclusively associated with infrastructure investments -- plant and equipment. It is more properly associated with all policy choices that have significant, long-term consequences: especially decisions about missions, programs, products, processes, or procedures.
There are standard solutions to several kinds of capital-budgeting problems: make or buy decisions, investment in working capital (especially inventories) decisions, maintenance-level decisions, project selection, the choice of mutually exclusive investments, and investments in plant with fluctuating rates of production. However, the same basic calculus of benefits and costs is supposed to guide all classes policy choices with long-term consequences.
Financial Theory
Financial theory teaches that, in the presence of a capital market where funds can be obtained at a price, welfare will be maximized by the implementation of all policy choices that generate positive net-present values. This means, in part, that the timing of benefits and costs is generally of no importance. Most students of financial economics further assert that capital budgeting decisions should also be independent of the source of financing -- value will be the same regardless of whether it is financed with debt, equity or taxes.
Taken together these two assertions imply that all capital budgeting decisions should be governed by cost-benefit analysis, which says: do it whenever benefits exceed costs.
Budget Processes
The institutional arrangements through which capital