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. A capital budget can be used to analyze the economic viability of a business project lasting multiple years and involving capital assets. Capital budgetingmanagerial economicslecture notes docsity. Introduction in this paper there is an effort to apply and present a set of methods of quantitative analysis for capital investment appraisal. This is for the purpose of evaluating and recommending to the. It represents the amount of time required for the cash. Capital budgeting practices and economic development. 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. There are four widely used capital budgeting techniques. It influences the rate and direction of firms growth. 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 is a process a business uses to evaluate potential major projects or investments. Budgeting of capital expenditure is an important factor in the management of a business. How a business firm decides whether or not to acquire durable real assets. A payback period pp it is the time period taken to recover the initial cash outlay of a project.
Traditional economic theory assumes this is their primary goal. Project should be charged for cannibalization of regular widget sales 6. Payback period doesnt work because of the time value of money. The capital budgeting process is a measurable way for businesses to determine the longterm economic and financial profitability of any investment project. Pdf this chapter is introductory to the academic course of capital. Capital investments are longterm investments in which the assets. A wrong decision may lead the firm to a disastrous future. This course illustrates its relationship with economic theory and decision sciences. Capital budgeting and economic development in the third. Capital budgeting decisions have longterm implications for the firm as they affect the future profitability of the firm and the cost structure. Capital budgeting and economic development in the third world. The term capital budgeting refers to long term planning for proposed capital outlays and their financing. A comparative study of companies in western europe and west africa. Capital budgeting decisions involve costly longterm investments with.
Pdf capital budgeting practices and economic development. It includes both raising of long term funds as well as their utilisation. Project should not be charged for paintingmachine time 5. It uses accounting profits instead of economic profits cash flows and does not consider the time. A simple method of capital budgeting is the payback period. Capital budgeting techniques investment appraisal criteria under certainty can also be divided into following two groups. Initial investment includes capital expenditure and wc 2.
Heart of managerial economics is micro economic theory. Beginners guide to capital budgeting managerial economics. 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. This book explains the monetary appraisal of capital budgeting tasks.