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Unformatted text preview: anagerial Decision Making 3. Capital Expenditure Decisions
Much of the discussion has focused on decisions relating to near-term operations and activities. But,
managers must also ponder occasional big-ticket expenditures that will impact many years to come.
Such capital expenditure decisions relate to construction of new facilities, large outlays for vehicles
and machinery, embarking upon new product research and development, and similar items where
the upfront cost is huge and the payback period will span years to come. Although we will focus on
the financial dimensions, it goes without saying that such decisions are made more complex because
they usually involve a number of nonfinancial components as well. Thus, the final decision may
involve consideration of architectural, engineering, marketing, and numerous other variables.
These types of decisions involve considerable risk because they usually involve large amounts of
money and extended durations of time. In addition, capital expenditure decisions (also called capital
budgeting) are usually accompanied by a number of alternatives from which to choose. Sometimes,
an option that is best in the near-term may be the least desirable in the long-term, and vice versa.
For instance, you are currently investing time and money in your education; probably you could
make more money in the near-term by working more hours in a paying job and devoting less time to
study -- but you know the long-term is better served by investing in your education. The same
challenge often faces managers. For example, should a new computer information system be
installed? In the near-term the business might appear more profitable by not buying a new system -but the long-run may be better served by making the investment. 3.1 Management Stewardship
Capital expenditure planning requires managers to effectively evaluate and rank alternatives. This
process must be matched/tempered by reasonable assessment of resource limitations and willingness
to assume risk. In addition, managers must understand the goals of business owners: What is to be
optimized, short-run or...
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