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Basics of Capital Budgeting

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Submitted By garlizzy
Words 1622
Pages 7
Week 6
Elizabeth Glasgow
Fitchburg state University
MGMT 9170
Saturday, March 26, 2016
Dr. Robert Gohary
Abstract
One of the most important responsibilities of any corporate financial manager is to decide which, if any, projects or investments opportunities the organization should undertake. The task of analyzing and comparing financials is a daunting task, but when utilizing the tools of capital budgeting, the process of this type of business decision making can be quite useful. This paper will define capital budgeting and discuss some of the components of this decision making tool. It will also discuss some of the concerns that go along with Capital Budgeting.

The Basics of Capital Budgeting
What is Capital Budgeting? Organizations looking to expand their business through asset acquisition create a capital budget (Paden, n.d.). Capital budgets exclusively are associated with real estate, equipment and other potential assets used to evaluate asset impact and the potential benefit to the organization. Capital Budgeting is the process in which a business determines whether a project or investment venture are worth pursuing. It is the process of analyzing investment opportunities and deciding which one to accept (Berk & DeMarzo, 2014). Potential ventures are evaluated and the potential expenditures or investments are ranked. Usually, these types of business decisions are for large purchases or investments.
Steps of Capital Budgeting There are seven steps involved in capital budgeting (Hofstrand, 2013). They are: 1. Identify long-term goals of the organization 2. Identify potential investment prospects for meeting long-term goals identified in Step 1 3. Estimate and analyze the relevant cash flows of the investment proposal identified in Step 2 4. Determine the fiscal feasibility of each proposal in Step 3 5. Choose the project

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