M4 Flashcards
process of evaluating and selecting long term investments that are consistent with the firm’s goal of maximizing wealth
capital budgeting
2 elements related to capital budgeting
- long term investment
- operating expenses
generates benefits for the company that last longer than a year
long term investment
benefit the company only during the operating period
operating expenses
long term investment aka
capital expenditures
capital expenditures
- expand or enter into a new time of business
- replace or renew fixed assets
- construct new premises
- opening a new branch
- acquisition of mechanism and equipment
risk return trade off
- in making investment decisions, financial managers take note of the risk and returns of the projects they are entering
- taking a higher risk gives the business owners the opportunity to earn higher returns
- in making investment decisions, financial managers ensure that the proposed business will earn more than the risk-free rate since they need to compensate for the risk the investment will entail
steps of capital budgeting
- investment proposal
- review and analysis
- decision making
- implementation
- monitoring
proposal for capital expenditures come from different levels within a business organization. these are submitted to the finance team for thorough analysis
investment proposal
financial personnel perform formal review and analysis to assess the benefits and cost of the investment proposal.
these personnel make use of several financial tools which they see fit in evaluating the project
review and analysis
companies usually delegate capital expenditure decisions based on value limits. the analysis is presented to the proper approving body who will in turn make the decision on wether to push through w/ the project or not
decision making
release of funds and start of the project occurs after approval. large expenditures are usually released in phases
implementation
results are monitored and actual cost and benefits are compared w/ those that were expected.
action may be required if deviations from the plan are significant in amount
monitoring
