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 …show more content…
Maccomon work (as cited in Kersyte, 2011) identifies six fundamental phases in the capital budgeting process. The first phase is investment opportunities and then development and evaluation is performed by collecting relevant and detailed information. The next phase is authorization or project approval and implementation and/or control. Post-auditing is the final phase that enables one to compare the outcome of each project with budget targets. These phases should be held in the wider context of strategic planning. Koch (as cited in Kersyte, 2011) listed six components in the process which are identification, search, information acquisition, selection, financing, and implementation and control. Ducai work (as cited in Kersyte, 2011) described the capital budget process in five stages. They are examining and selection of the investment project, the proposal of the capital budget, the approval of the budget and its authorization, surveying the execution of the project and exerting the control after the project execution starts. The four stages described by Burns & Walker (as cited in Kersyte, 2011) are identification, development, selection, and …show more content…
This is because it allows managers to adjust the discount rate of intermediate term cash flow to better match a realistic return for the cash flow.
It is possible modified internal rate of return will gain acceptance in the delayed manner that net present value gained acceptance over a period of several decades. If this is to be the case, we may see a surge in modified rate of return applications over the next decade as more financial managers work with this technique especially if the reinvestment rate argument is valid. (Ryan & Ryan, 2002, p. 361)
According to Chen, (2012) analyzing corporate finance practices in Europe sampling companies from UK, Netherlands, Germany, and France using capital budgeting techniques, cost of capital estimates, capital structure, and corporate governance. The results of this sample showed that most European companies choose payback period as their most popular capital budgeting method, followed by net present value and internal rate of return. They also did a survey of 214 Canadian CFOs on the capital budgeting methods used in their firms. Their result also showed that net present value, internal rate of return, and payback method as their popular methods. The results shows that 49.2%, 45.8%, and 38.8% of respondents always use net present value, internal rate of return, and payback
“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 …show more content…
Maccomon work (as cited in Kersyte, 2011) identifies six fundamental phases in the capital budgeting process. The first phase is investment opportunities and then development and evaluation is performed by collecting relevant and detailed information. The next phase is authorization or project approval and implementation and/or control. Post-auditing is the final phase that enables one to compare the outcome of each project with budget targets. These phases should be held in the wider context of strategic planning. Koch (as cited in Kersyte, 2011) listed six components in the process which are identification, search, information acquisition, selection, financing, and implementation and control. Ducai work (as cited in Kersyte, 2011) described the capital budget process in five stages. They are examining and selection of the investment project, the proposal of the capital budget, the approval of the budget and its authorization, surveying the execution of the project and exerting the control after the project execution starts. The four stages described by Burns & Walker (as cited in Kersyte, 2011) are identification, development, selection, and …show more content…
This is because it allows managers to adjust the discount rate of intermediate term cash flow to better match a realistic return for the cash flow.
It is possible modified internal rate of return will gain acceptance in the delayed manner that net present value gained acceptance over a period of several decades. If this is to be the case, we may see a surge in modified rate of return applications over the next decade as more financial managers work with this technique especially if the reinvestment rate argument is valid. (Ryan & Ryan, 2002, p. 361)
According to Chen, (2012) analyzing corporate finance practices in Europe sampling companies from UK, Netherlands, Germany, and France using capital budgeting techniques, cost of capital estimates, capital structure, and corporate governance. The results of this sample showed that most European companies choose payback period as their most popular capital budgeting method, followed by net present value and internal rate of return. They also did a survey of 214 Canadian CFOs on the capital budgeting methods used in their firms. Their result also showed that net present value, internal rate of return, and payback method as their popular methods. The results shows that 49.2%, 45.8%, and 38.8% of respondents always use net present value, internal rate of return, and payback