Capital Budgeting Projects Essay

Exclusively available on Available only on IvyPanda® Made by Human No AI

Introduction

Capital budgeting is the process assumed by a firm to make long-term decisions, which have a direct effect on the investment of the company or business for that matter. It determines whether an organization’s long-term objectives are worth pursuing and budgets on the substantial capital investment of a business and the expenditures.

Capital budgeting projects generate the cash flows for years. Any capital budgeting project can be accepted or rejected depending on its effect on the net value and internal rate of return method (Good pasture, 2004). Some characteristics of capital budgeting projects may cause the net present value and the rate of return method to the ranking of the projects to be extremely differently.

Characteristics of mutually exclusive capital budgeting projects

In mutually exclusive budgeting projects, only one of the projects is chosen. The selection is in accordance to the effect on Net Present value and internal rate of return. However, these characteristics do not consider the future cash flows of the business in the future. As a result, the flow of cash, if discounted comparing with the cost of capital, is not effective. This event is extraordinarily dangerous because the project may not last for a long time (Brigham & Houston, 2008).

These types of budgeting fail to consider the period that can lead to the recovery of the capital outlay for the budgeted project. These types use the shortest payback period not considering the risks that may occur such as losses and administrative complications at the end of cash flow of the business if negative. These mutually exclusive projects may fail to maximize the wealth of the shareholders hence may not so effective.

Compared to the independent projects, which focus more on maintaining the cash flows in cases of accepting or rejecting of a decision meant for other projects, many differences arise. However, for the decision-making manager, it is wise to figure out the impacts that are mutually exclusive to the relevant projects and can result to the desired outcome.

Mostly, these are only acceptable when dealing with a small business and not in cases where lots of money is involved (Keown, 2004). A manager should be keen to find out what suits the firm best and after what period. Cash flows of a firm operating with lots of money is necessary for constant growth of the business.

When making a decision for a firm, it is necessary to calculate the internal rate of return in order to find out which is the best project to undertake and maximize profits. However, depending on the properties of a significant capital budgeting, it is wise for a project chosen to consider the cash flows of a firm in the future.

However, the budget that maximizes the wealth of the shareholders is the best to choose when making a decision (Baker & Powell, 2005). Therefore, before making any decision for a firm’s budget, a lot of concern must be part of the considerations set to ensure that all strategies work as planned. In many cases, risks are always there, and they profoundly affect the budget of any firm. Therefore, it is better to prevent risks and maintain the flow of cash.

References

Baker, H. & Powell, G. (2005). Understanding Financial Management: A practical Guide. London: Blackwell Publishing Ltd.

Brigham, E. & Houston, J. (2008). Fundamentals of Financial Managemet. NewYork: Cengage Leaning.

GoodPasture, J. (2004). Quantitative Methods in Project Management. Washiongton D.C: J. Ross Publishing Inc.

Keown, A. (2004). Foundations of Finance: The Logic & Practice of Financial Management. Hong Kong: Tsingua University Press.

More related papers Related Essay Examples
Cite This paper
You're welcome to use this sample in your assignment. Be sure to cite it correctly

Reference

IvyPanda. (2019, May 8). Capital Budgeting Projects. https://ivypanda.com/essays/capital-budgeting-projects-essay/

Work Cited

"Capital Budgeting Projects." IvyPanda, 8 May 2019, ivypanda.com/essays/capital-budgeting-projects-essay/.

References

IvyPanda. (2019) 'Capital Budgeting Projects'. 8 May.

References

IvyPanda. 2019. "Capital Budgeting Projects." May 8, 2019. https://ivypanda.com/essays/capital-budgeting-projects-essay/.

1. IvyPanda. "Capital Budgeting Projects." May 8, 2019. https://ivypanda.com/essays/capital-budgeting-projects-essay/.


Bibliography


IvyPanda. "Capital Budgeting Projects." May 8, 2019. https://ivypanda.com/essays/capital-budgeting-projects-essay/.

If, for any reason, you believe that this content should not be published on our website, please request its removal.
Updated:
This academic paper example has been carefully picked, checked and refined by our editorial team.
No AI was involved: only quilified experts contributed.
You are free to use it for the following purposes:
  • To find inspiration for your paper and overcome writer’s block
  • As a source of information (ensure proper referencing)
  • As a template for you assignment
Privacy Settings

IvyPanda uses cookies and similar technologies to enhance your experience, enabling functionalities such as:

  • Basic site functions
  • Ensuring secure, safe transactions
  • Secure account login
  • Remembering account, browser, and regional preferences
  • Remembering privacy and security settings
  • Analyzing site traffic and usage
  • Personalized search, content, and recommendations
  • Displaying relevant, targeted ads on and off IvyPanda

Please refer to IvyPanda's Cookies Policy and Privacy Policy for detailed information.

Required Cookies & Technologies
Always active

Certain technologies we use are essential for critical functions such as security and site integrity, account authentication, security and privacy preferences, internal site usage and maintenance data, and ensuring the site operates correctly for browsing and transactions.

Site Customization

Cookies and similar technologies are used to enhance your experience by:

  • Remembering general and regional preferences
  • Personalizing content, search, recommendations, and offers

Some functions, such as personalized recommendations, account preferences, or localization, may not work correctly without these technologies. For more details, please refer to IvyPanda's Cookies Policy.

Personalized Advertising

To enable personalized advertising (such as interest-based ads), we may share your data with our marketing and advertising partners using cookies and other technologies. These partners may have their own information collected about you. Turning off the personalized advertising setting won't stop you from seeing IvyPanda ads, but it may make the ads you see less relevant or more repetitive.

Personalized advertising may be considered a "sale" or "sharing" of the information under California and other state privacy laws, and you may have the right to opt out. Turning off personalized advertising allows you to exercise your right to opt out. Learn more in IvyPanda's Cookies Policy and Privacy Policy.

1 / 1