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A new business owner is thinking about a new project that will hopefully increase sales for...

A new business owner is thinking about a new project that will hopefully increase sales for the company. What advice can you give the owner about capital budgeting?

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Expert Solution

Capital budgeting decisions are considered to be vital for any kind of businesses whether it is new or existing or small or large business etc. decisions on investment which takes time has to be based on the returns that the investment would provide. Unless is the project is for social reasons, if the investment is unprofitable in the long run it would be unwise to invest it for now.

Often it is better to know what the present value of future investment is or how long would it take to give returns. It would always be profitable to put the planned money investment in the bank & earn interest or invest in an alternative project.

A systematic approach to capital budgeting implies:

a) The formulation of long-term goals

b) The creative search for and identification of new investment opportunities

c) Classification of projects and recognition of economically and/or statistically dependent proposals

d) The estimation and forecasting of current and future cash flows

e) A suitable administrative framework capable of transferring the required information to the decision level

f) The controlling of expenditures and careful monitoring of crucial aspects of project execution

g) A set of decision rules which can differentiate acceptable from unacceptable alternatives is required.

Capital budgeting is important because it creates accountability and measurability. ... The capital budgeting process is a measurable way for businesses to determine the long-term economic and financial profitability of any investment project.

jeff jeffy answered 2 years ago
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