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Capital Investment
This is concerned with the type of mix of fixed assets employed by a firm.
When a fixed asset is due to be replaced a decision has to be taken as to which of several competing assets to purchase.
When a business is planning for expansion, investment decisions ate usually taken by top management. These decisions must be fully analysed as they result in :
*Large sums of money
*The quality of the decision taken affects the profitability and liquidity of the firm for several years
[Significant period between the outlay ( the amount invested) & the receipts of benefits]
*Having purchased an item of fixed asset or embarked on along term project, the decision is usually irreversible. To terminate such decision can prove very costly.
* There is increased risks and uncertainty as forecasts become less reliable the further it extends into the future.
Managers must consider:
* Project's initial cost ( outlay)
* Projects estimated life
* Amount & timing of estimated cash flows
* Any additional working capital requirement during the projects
* Inflation
* Economic changes
* Political Changes
How many capital budgeting techniques are there?
There are two.
Non-Discounting Techniques
Discounting Techniques
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