INTRODUCTION
Capital budgeting is the planning of long-term corporate financial projects relating to investments funded through and affecting the firm's capital structure. Management must allocate the firm's limited resources between competing opportunities (projects), which is one of the main focuses of capital budgeting.
Secondly, Capital budgeting is also concerned with the setting of criteria about which projects should receive investment funding to increase the value of the firm, and whether to finance that investment with equity or debt capital. Investments should be made on the basis of value-added to the future of the corporation. Capital budgeting projects may include a wide variety of different types of investments, including but not limited to, expansion policies, or mergers and acquisitions. When no such value can be added through the capital budgeting process and excess cash surplus exists and is not needed, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program.
Choosing between capital budgeting projects may be based upon several inter-related criteria.
(1) Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate in consideration of risk.
(2) These projects must also be financed appropriately.
(3) If no positive NPV projects exist and excess cash surplus is not needed to the firm, then financial theory suggests that management should return some or all of the excess cash to shareholders (i.e., distribution via dividends).
TABLE OF CONTENTS
Cover Page i
Title Page ii
Acknowledgementiii
Table of Contents iv
CHAPTER ONE
-Capital Budgeting Definition 1
-Features and Significance of Capital Budgeting 3
-Characteristics of Capital Budgeting 5
CHAPTER TWO
-The Importance of Capital Budgeting 12
-Problems and Difficulties in capital Budgeting 17
CHAPTER THREE
-Analysis of Risk in Capital Budgeting 19
-Method of Measuring Risk and Illustrations20
CHAPTER FOUR
-Capital Budgeting Process 31
-Types of Capital Budgeting Decisions 35
-Capital Investment Process 36
References
CHAPTER ONE
-Capital Rationing 40
-Types of Capital Rationing 43
CHAPTER TWO
-Capital Rationing Decisions 44
-Factors leading to Capital Rationing 45
References