Assignment:
Respond to both in apa 250 words or more
The Capital Budgeting Process is indeed the most important process that a firm undertakes as can be seen from the following discussion. According to Berk and DeMarzo (2014), capital budgeting is a process used by firms to evaluate which investment opportunities and projects to pursue.
Future cash flows of a particular potential project can be estimated by capital budgeting (Berk &DeMarzo, 2017). The decision to whether accept or reject an investment project involves determining the investment rate of return that such a project will generate. However, what rate of return is deemed acceptable or unacceptable is influenced by other factors as well that are specific to the company as well as the project.
Capital budgeting is important because it creates accountability and measurability both at the same time.It is a measurable way for businesses to determine the long-term economic and financial profitability of any investment project. If any Company decides to invest in a project without understanding the risks and returns involved in it, it would be held as irresponsible by its owners or shareholders.
The Capital Budgeting is also important to a Company as it creates a structured step by step process that enables a company to
1) Develop and formulate its long-term strategic goals to plan out its future long-term direction.
2) Find out which new investment projects it could undertake to compete against its rivals and make profits.
3) Estimate its future cash flows it would be able to achieve.
4) Monitoring and making efforts to control its Expenditure.
5) Make a quick decision to accept or reject a project.
Thus, it could be clearly seen that unlike other business decisions that involve only a singular aspect of a business, a Capital Budgeting decision involves two most important decisions at the same time. A financial decision and investment decisions. In addition, to a financial decision taken by the company, it is also making an investment in its future direction and growth that will likely to have an influence on future projects that the company considers and evaluates.
So it can be rightly said that Capital Budgeting Process is the most important process that a firm undertakes because it has a major impact on which project or business a Company chooses as it facilitates the appraisal and selection of the most viable investments which is so vital for the growth of the firm and the various stakeholders associated with it. One can say that running a business is nothing more than a constant exercise in capital budgeting decisions.
Capital budgeting is one of the most crucial process that a firm will undertake. According to Berk and DeMarzo (2014), capital budgeting is a process used by firms to evaluate which investment opportunities and projects to pursue. This process is critical to a company's success because it scrutinizes the potential consequences of the firm's choice to invest or take on a project.
Capital budgeting allows a company to create long-term goals by evaluating potential investments and cost. Capital budgeting also allows a firm to forecast future revenue from the decision, so executives can decide if a project or venture will be profitable over time. Knowing if an investment will be profitable is essential because the primary purpose of financial management is to maximize stockholder wealth (Berk &DeMarzo, 2014).
Other benefits of utilizing a capital budget are that it allows decision makers to monitor and regulate expenses. It also gives executives the required information to create and use decision rules that determine the best course of action for the company (Gad, 2015). Peavler (2017) suggested that comparing the rate of return on a project to the weighted average cost of the project is one of the most critical steps in capital budgeting. She further stated that if rate of return is less than the weighted average cost of capital, then the investment opportunity should be declined.
The capital budgeting process is vital for company's success. It allows a company to strategically evaluate which investment opportunities and projects would benefit the company in the long run. In the end, this is the most important process a firm will undertake because it allows executives to see which projects will create profit for stockholders and which will not.