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
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