Question

identify and briefly explain the five reasons that firms initiate capital project

Answer 1

Answer:

Five reasons why firms initiate capital projects are:

1. To ensure growth in future

The first an foremost reason why firms go for capital projects is to enhance their profitability through expansion of their business leading to growth and developemnt in future. The main motive is to grow in future, which is why firms go for such projects such as including infrastructure, etc.

2. Increase operational capacity

When a firm operates on a small scale, it is not able to bring out economies of scale and enjoy operational efficiency. However, capital and infrastructure projects that help in expanding the scope of businesses, helps in enhancing operational efficiency as well as bringing economies of scale.

3. Increase revenue

When a business grows, it leads to more and more revenue for it which is only possible through expansion, taking up projects and furthering the activities of the existing business.

4. Capture a large share of market

Going in for expansion with the help of capital projects leads to increase in the existing capital share, thus expanding the market base for corporations.

5. Long run survival

Last but not least, investing in capital projects and ensuring continuous growth through expansion leads to long run survival of a firm.