-Managers must make decisions on investment involving how much to invest, what capital to be purchased, how to finance the investment etc.
-Investment is simply an addition to the firm’s stock of resources, generally, involving the purchase of capital equipment or land.
-Investment decision is based on marginal analysis i.e. marginal benefits and marginal costs.
Capital Budgeting
-Capital budgeting is simply investment analysis, that is, the process of planning for the purchases of assets whose returns (cashflows) are expected to continue beyond one year. -What makes capital budgeting decisions; the managers of a firm are committing the firm’s resources to the expansion of its productive capacity, an improvement in its cost efficiency, or a diversification in its asset base.
Each of these decisions has important implications for the future cash flow the firm can be expected to generate and the risk of those cash flows.
– Capital expenditures are a bridge between the short-term price and output determination decisions facing managers daily and the longer term strategic decisions that wealth maximising managers must make to remain competitive.
Public sector managers use the techniques of cost-benefit analysis and cost-effectiveness analysis when analysing many long term resource-allocation decisions.
– Capital budgeting is also defined as the process of planning for and evaluating capital expenditures.
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