Capital Budgeting: Importance, Principles, Process, and Techniques (Term Paper Sample)

Student Name
Professors Name
Course
Date
CAPITAL BUDGETING
Abstract.
One of the main concerns of financial management has been to finance dividends and business decisions of the business/organization having some objectives/goals in mind. This has brought about the development of corporate finance theory intending to maximize the organization's market value to its shareholders. The most widely accepted firm objective is to maximize the firm's value to its owner rather than shareholder wealth maximization. Capital budgeting has been an essential tool in determining the firm's long-term investments, including machinery replacement or even the new products worth the funding through the firm capitalization structure. It is also concerned with resource allocation in capital expenses. Increasing the firm's value to the shareholders has been the primary goal of capital budgeting. Capital budgeting decisions are crucial to an organization as a firm must determine the strategy to raise and repay outlaid funds. Capital budgeting also requires good timing and long-term commitments. The paper discusses the structure of capital budgeting, the process of capital budgeting, the importance of capital budgeting, how capital budgeting compares with other budgeting forms, and finally, the risk that are associated with capital budgeting.
Keywords: Financial Management, capital budgeting, Investment appraisal, planning process,s and capitalization structure.
Contents TOC \o "1-3" \h \z \u Introduction PAGEREF _Toc101445950 \h 2Objectives of study PAGEREF _Toc101445951 \h 3Research methodology PAGEREF _Toc101445952 \h 4Principles of capital budgeting PAGEREF _Toc101445953 \h 5Process of capital budgeting PAGEREF _Toc101445954 \h 6TECHNIQUES OF CAPITAL BUDGETING PAGEREF _Toc101445955 \h 7The differences between other budgeting forms PAGEREF _Toc101445956 \h 9Recurformbudget PAGEREF _Toc101445957 \h 9The interaction between capital budgeting and recurrent budgeting; PAGEREF _Toc101445958 \h 10Cash budget PAGEREF _Toc101445959 \h 10Master Budgeting PAGEREF _Toc101445960 \h 10The risk associated with capital budgeting PAGEREF _Toc101445961 \h 11Problem and difficulties in capital budgeting PAGEREF _Toc101445962 \h 12Conclusions PAGEREF _Toc101445963 \h 13References PAGEREF _Toc101445964 \h 14Appendixes PAGEREF _Toc101445965 \h 15
Introduction
Capital budgeting ensures that capital allocation is done efficiently by involving the best decision to commit the firm's funds to long-term assets. Capital budgeting decisions determine the organization's value by stimulating profitability and risk assessment growth. Most organizations invest in long-term assets, including company properties, plants and equipment, giving them long-term benefits. A firm's decision is either a financing decision, investment decision, or operating decision. Financing decisions are the decision that a company makes regarding the share in debt and equity. It helps finance their assets and also creates shareholder value.
Operating decisions are the decision made regarding the daily routine operation of the company. It contains detailed information on the work that needs to be done to meet the firm's objectives. An example of an operational decision includes printing and distributing discount coupons, and this help attracts many clients/customers to the company and thus maximizes sales. Investment decisions have the firm's strategy to fund/increase/ control its investment.
The decisions involving long-term investments are referred to as Capital budgeting decisions. These decisions are used in allocating funds to long term assets. Long term investments require significant consideration as they have long-term implications and affect the future growth and profitability of the firm. Thus, capital budgeting is of great importance to a company as it is a continuous process, and all decisions that require resources are dependent on it.
Objectives of the study
The main aim of carrying out this research is to;
Understand the importance of capital budgeting
Determine component of capital budgeting
Study the capital budgeting process
Determine the various techniques used in capital budgeting and the risk associated with each technique
Research methodology
The research is based on prior investigations conducted, journal books, online databases, websites, and case studies based on secondary data. The analysis itself is descriptive.
Importance of capital budgeting
Capital budgeting is an essential financial management tool because it provides a means of measuring the value of the project life. It is used to rank and assess the value of the projects that require a significant capital investment to determine if they are worth trailing. CITATION Gro13 \l 1033 (Grob, 2013)One example in which investors can use capital budgeting is analyzing the investment options to develop the most effective and worthwhile option. The decision-maker can make informed decisions for a project requiring a significant capital investment. The projects that need