Master the process of evaluating and selecting long-term investments
Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the firm's goal of maximizing owner wealth. It involves analyzing potential projects or investments to determine which ones are worth undertaking.
Key Insight:
Capital budgeting decisions are critical because they involve large expenditures, have long-term impacts, and affect the firm's strategic direction.
Capital Budgeting
The process of evaluating and selecting long-term investments that are consistent with the firm's goal of maximizing owner wealth
Capital Expenditure
An outlay of funds expected to produce benefits over a period of time greater than 1 year
Operating Expenditure
An outlay of funds resulting in benefits received within 1 year
Independent Projects
Projects whose cash flows are unrelated; acceptance of one does not eliminate others
Mutually Exclusive Projects
Projects that compete with one another, so acceptance of one eliminates others from consideration
Unlimited Funds
Financial situation where a firm can accept all independent projects that provide an acceptable return
Capital Rationing
Financial situation where a firm has limited funds and numerous projects compete for these dollars