Capital Budgeting: A Case Study

An ultimate goal of business and investor in the firm is to maximize the value of the financial assets. The most significant point in the firm is to make the decision on the capital outlays. The decision that has been made will influence the performance of firm over a decade. The capital budgeting decision requires the broad planning in order to ensure the business and marketing information is obtainable, product design is completed, necessary pattern is obligatory and capital market structure is aligned with the necessary fund (Hirt, Stanley, & Bartley, 2011). Capital budgeting is the planning process in which it has been used in order determined the firm’s long term investment in term of new machinery or the replacement of machinery, new

As known, capital budgeting is involves in long term financing. Because of that, the firms will tangle to the project and loses some of the flexibility during the project. Other than that, capital budgeting is used to forecasting the revenue of the asset in term on making decision to purchase the asset (Investopedia, 2014). Thus, the capital budgeting can be define as a strategic planning of the firm in order to maximize the profits. Capital budgeting is the process where the resources have been allocated for the major capital, investment and expenditures and make the decision leads to the goal of shareholder wealth maximization (Hossain, 2014). The investment decision will rely upon the decision rule that is applied under circumstances. The organization need to have a good capital budgeting because it involves the massive investment of

Risk will rises in project estimation due to the firm that is unable to forecast of the existence. Consequently, the potential future events with inevitability cannot make any precise prediction about the cash flows. The uncertain economic conditions are the sources of uncertainty in the cash flows. Risk exists on account of the inability of the firm to make perfect forecasts of cash flows. The capital budgeting suggestions are not grounded on impeccable estimation of costs and revenues. The norms of the future performance of the cost and revenue may be slightly changes in arrears to the unpredictable forecasting. There are many kinds of risks that need to be taken into account when considering capital budgeting. The example of risk types are corporate risk, international risk, industry specific risk, market risk, stand-alone risk and project-specific risk (Boundless, 2014). Each of these risks discourses an area in which some sort of volatility could effectively alter the plan of firm managers. Because to the increasing of the volatility in the global economy, the investor taking action in find the safer investment alternative (Adams, 2014). Capital budgeting has been used in order to select the good investment due to unavoidable risk in the investment. There are many risk in investment such as the cash flow