Capital Budgeting to Enhance Business Profitability (Essay Sample)

Capital Budgeting

Capital budgeting is sought to enhance business profitability. A business normally deals with two kinds of expenditures – capital expenditures and revenue expenditures. Both are equally essential to run a business.
But, capital expenditures are particularly sought to enhance business profitability and shareholder value. It deals with investing in new or replacing plant and machinery, purchasing building for factory or business purpose, investing in long term ventures and worth pursuing research and development projects etc. Thus, capital budgeting have been widely acknowledged as the key to business growth and profitability enhancement (Investopedia, n.d).
How an organization would determine the total value to be allocated towards capital projects?
The most countable factor in allocating value to capital projects is owners will proper analysis and planning. From technical aspect there are number of methods to determine the total value to be allocated towards capital projects and some are internal rate of return, net present value, accounting rate of return, modified internal rate of return, equivalent annuity and profitability index.
Most commonly the internal rate of return and net present value are used to determine the value of capital projects. The internal rate of return investigates that how much the monetary gain will happen by pursuing a capital project. Similarly, the net present value investigates the futuristic gains of doing a project. Therefore, both methods determine the positive gain in growth and profitability of business.
Discuss the key factors that would determine if a project should be approved in a capital budgeting process
The only key factor in determining the project approval in a capital budgeting process is the business growth and profitability. Since the major purpose of capital budgeting is to enhance the shareholder’s value. Therefore, the project which decrease the running cost of business and increase the profitability should be approved in a capital budgeting process.
After a capital project has been approved and completed, discuss how you would assess whether or not the project had the desired financial return
The considerable part of assessing the capital project return is to assess