Dr andros gregoriou lecture 2, capital budgeting 2 we assume that all projects have the same level of risk, since all cash flows are known with certainty. In this writeup, i shall explain as simply as is possible 1 how modern business firms decide whether or not to purchase with the firms investible funds longlived assets land, machines. The capital budgeting process is a measurable way for businesses to determine the longterm economic and financial profitability of any investment project. How a business firm decides whether or not to acquire durable real assets. Capital budgetingmanagerial economicslecture notes docsity. Capital budgeting decisions involve costly longterm investments with. It represents the amount of time required for the cash. Heart of managerial economics is micro economic theory.
Pdf this chapter is introductory to the academic course of capital. A capital budget can be used to analyze the economic viability of a business project lasting multiple years and involving capital assets. It uses accounting profits instead of economic profits cash flows and does not consider the time. Capital investments are longterm investments in which the assets. Budgeting of capital expenditure is an important factor in the management of a business. Initial investment includes capital expenditure and wc 2. Introduction in this paper there is an effort to apply and present a set of methods of quantitative analysis for capital investment appraisal. This course illustrates its relationship with economic theory and decision sciences. Capital budgeting decisions have longterm implications for the firm as they affect the future profitability of the firm and the cost structure. The protection extends from the event of primary ideas, rules and methods to the appliance of them in more and more complicated and actualworld conditions.
The main purpose of this research was to delineate unearth lacunae in the extant capital budgeting theory and practice during the last two decades and ipso facto become springboard for future. Capital budgeting and economic development in the third. This is for the purpose of evaluating and recommending to the. Capital budgeting practices and economic development. Payback period doesnt work because of the time value of money. It includes both raising of long term funds as well as their utilisation. A comparative study of companies in western europe and west africa. It influences the rate and direction of firms growth.
Capital budgeting is a process a business uses to evaluate potential major projects or investments. Pdf capital budgeting practices and economic development. A payback period pp it is the time period taken to recover the initial cash outlay of a project. There are four widely used capital budgeting techniques. Project should not be charged for paintingmachine time 5. Ologunde department of management and accounting faculty of administration obafemi awolowo university ileife, osun state nigeria abstract poor and unrealistic capital budgeting has long been the bane of socioeconomic. A wrong decision may lead the firm to a disastrous future. Beginners guide to capital budgeting managerial economics. This book explains the monetary appraisal of capital budgeting tasks. The term capital budgeting refers to long term planning for proposed capital outlays and their financing.