Essay on Capital Budgeting : A Strategic Plan

2535 Words Nov 3rd, 2014 11 Pages
A firm cannot operate unless it has a strategic plan. Management is put in place to make decision for these plans to make a firm successful. Important decision by management is considered capital budgeting. This is how a company knows if an investment is worth it. Capital budgeting helps a company to strategize for the next few years (Parrino, Kidwell, & Bates, 2011).
“Capital budgeting projects can be classified into three types: (1) independent projects, (2) mutually exclusive projects, and (3) contingent projects. Capital budgeting have two terms cost of capital and capital rationing (Parrino, Kidwell, & Bates, 2011, pp. 304-305). Parrino, Kidwell, & Bates (2011) further noted that cost of capital can also be thought of as opportunity cost and is the required rate of return for a capital investment. A firm may be taking a chance when they invest in one asset over another. If there is a chance that the firm does not have enough capital to invest they use capital rationing. This way they will be able to secure the stockholder’s value and limit the capital expenditures. Capital budgeting is a process of constant change that help make decision in relation to the company’s multiple stakeholders. The information is beyond a doubt and can be recognized and improved overtime. This is a decision process that contains sequential and multiple information that is needed to obtain cash flow estimates into the financial analysis of the cash flow. Normative approach and the process…

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