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Analysis/Capital Budgeting
Capital Investment Analysis/Capital
Budgeting:
Learning Objectives:
After
studying this topic you should be able to:
Define and explain capital
investment analysis.
Evaluate capital investment
proposals using average rate of
return method, cash payback method,
net present value method, and
internal rate of return method.
Explain the advantages and disadvantages of
various methods of evaluating capital
investment proposals.
Explain the concept of the time value of
money (present value and future value).
Contents:
Capital investment analysis is
a process of planning, evaluating, and
controlling investments in plant assets. It
is also known as capital budgeting.
Management should carefully develop and
implement capital investment analysis
because it involves long term investment in
assets that effects operations for many
years. Capital investment decisions are very
important because they involve long term
commitment of funds. An enterprise has to
meet obligations to creditors and provide
dividends to stockholder so these
investments must earn a sufficient rate of
return.
Employees at all levels should be
encouraged to submit their proposals for
capital investments. Serious considerations
should be given to all reasonable proposals.
Management should carefully identify the
effects of economic implications that are
expected from these proposals. Employees
whose proposals are accepted for
implementation should be rewarded by the the
enterprise.
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