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Capitol Budgeting Long Term Financing - Assignment Example

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REASONS WHY CAPITAL BUDGET IS GIVEN ATTENTION Name Prof Institution Subject Code Introduction The future survival and productivity of almost all business entities from small to big, Public Companies to privately owned firms and largest international corporations depend on the well judged acquirement, maintenance, and disposal of capital assets…
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Capitol Budgeting Long Term Financing
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Capitol Budgeting Long Term Financing

Capital assets receive attention because they commit a firm for long term. These capital assets are commitment of over a year and sometimes for decades for instance, real estate. Economically, the resources being scarce and competitive in nature, there would be wrong allocation of such resources at the wrong time or on a non rewording asset. Assets acquisition analysis According to (Baker, & Powell, 2005) any company will invest finance for the sake of gaining a return which is useful for four focal reasons: 1. To recompense the shareholders or owners of the enterprise for staking their money and by sacrificing their current purchasing power for the sake of current and future cash flow 2. To reward lenders by paying them regular return on their money borrowed in the form of interest and principal repayment as and when it falls due. 3. To be able to plough back retain part of their earnings for the purpose which facilitates not only the companies’ short term growth and long term growth but also has the implication of increasing the size of the company in terms of sales, in assets as well as shareholders wealth. 4. To increase the share prices and thus the credibility and goodwill of the company and its capability to raise further finance. Such return is necessary to keep the company’s operations moving straightforwardly and efficiently thus allowing the above objective to be accomplished. A financial manager and decision makers must present investment policies which will be concerned with how efficiently the company’s funds are invested because it is from such investment that the company will survive. The investments are important because: They influence company’s size, Influence growth Influence company’s risks In addition, to this investment decision making process which is also known as capital budgeting, involves the decision to invest the company’s current funds in viable ventures whose returns will be realized for long term periods in future. Capital budgeting as financial planning is characterized by the following: a. Decisions of this nature are long term i.e. extending beyond one year in which case they are also expected to generate returns of long term in nature. b. Investment is usually heavy (heavy capital injection) and as such has to be properly planned. c. These decisions are irreversible and any mistake may cause the company heavy losses. Importance of Investment Decisions 1) Such decisions are importance because they will influence the company’s size (fixed assets, sales, and retained earnings). 2) They increase the value of the company’s shares and thus its credibility. 3) The fact that they are irreversible means that they have to be made carefully to avoid any mistake which can lead to the failure of such investment. 4) Due to heavy capital outlay, more attention is required to avoid loss of huge sums of money which in the extreme may lead to the closure of such a company. However, these decisions are influenced by: I. Political factors – Under conditions of political uncertainty, such decisions cannot be made as it will entail an element of risk of failure of such investment. Thus political certainty has to be analyzed before such decisions are made, such factors must be taken into account such that the company forecasts the inflows and outflows within given. Limitations such as the ... Read More
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