56588998.docx - Chapter one Introduction No decision places...

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Chapter one Introduction No decision places a company in more jeopardy than those decisions involving capital improvements. Often these investments can cost billions of dollars, and without a suitable return the very existence of the company can be compromised . In the course of their business, firms have to make capital investment decisions. This involves critical evaluation of long-term investments and their impact on the value of the company. The corporations make large investments in buildings and land, and in plant and equipment. There is a constant need for modernization of equipment due to changes in technology. As the firm grows, they need larger facilities. A firm may embark on new projects, which may entail large investment of time and capital. The firm considers all these decisions in light of the long-term benefit of the corporation. From the financial point of view, only those projects will be acceptable that add to the value of the firm, and increase the wealth of the owners of the firm. A company has to evaluate many projects. Some of these projects may be mutually exclusive in the sense that you have to pick only one and exclude others. A company may want to install gas heat, or oil heat, in a factory, but not both. The company may have to evaluate several alternative projects and rank them according to their profitability. Finally, they may have to pick only one or two projects that they can finance with the available capital. Thus, capital budgeting becomes an important issue. 1.1 Scope of the Paper : The paper has been prepared with considering the following scopes: The main focus of the paper is to understand the concept of capital budgeting. The paper identifies the factors influencing the need of capital budgeting. The paper evaluates factors affecting changes in capital budgeting decision. It identifies different capital budgeting techniques, their advantages and disadvantages. Page | 1
1.2 Objective of the Paper: The paper has been undertaken with the following objectives: To identify scopes of improvement in the capital budgeting process. To evaluate the strengths and weaknesses of each capital budgeting method and conduct a comparison To identify those capital budgeting practices that are used in the private sector To learn about the risks involved in capital budgeting decision. 1.3 Limitation of the Paper: The paper is subjected to the following limitations: The paper has been prepared under the time constraints. All the rationales are based on secondary data. Page | 2
Chapter Two Capital Budgeting Capital budgeting is the process of planning significant outlays on projects that have long-term implications such as the purchase of new equipment or the introduction of a new product Capital budgeting can be defined as the process of analyzing, evaluating, and deciding whether resources should be allocated to a project or not. It is the process by which the financial manager

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