MCAFR

Making capital investment decisions in business

Making capital investment decisions in business

Introduction

If investing were as simple as identifying projects with excellent benefits competitive (moats - economic moats or competitive advantages), earn money in capital markets would be much easier. But the reality is that the price you pay for action is essential to the future return on your investment. Wait until the action is to trade below their intrinsic value and buy. Valuation of projects is not an easy exercise. Many investors know all about certain projects that have invested or are considering investing, but cannot answer a simple question: "how much is worth? These same investors, who haggle the price of a car or drive a few extra miles to save a few cents gasoline, buy shares only a vague idea of the potential value of the business or because someone tells them that the action is going up. The reason this happens is simply because it is difficult to evaluate projects - even for professionals - so many people do not even try. After all, it is easy to verify that a car dealership or a petrol pump is offering a good deal because it can be easily compared with these prices with the competition. But in evaluation of projects, two obstacles were found: First, each project is slightly different, which make comparisons difficult. Exchange growth, returns on capital, forces of the competitive advantages and a number of other factors affecting the value of a business (Götze et al, 2008, p.ND).

Thus, comparing two projects is an exercise complex. Second, the value of a project is directly linked to the financial performance future - which is unknown, although some predictions can be made. For these two reasons, most investors focus their attention on the information that is more readily available - the share price - and ignore that which is most difficult to get - the value of your business. That's the bad news. The good news is the fact that investors do not need to know how to value a project before buying the shares. All an investor need to know is that the current price is much lower than the likely value of the business. The simple exercise to estimate the value of a share of a project is essential to evaluate the feasibility and invest in the project at a lower price than its potential value because, in order to buy the project for less than they are worth, investor must have an idea of what they are worth

This research paper explains the concepts of conducting capital budgeting. Furthermore the paper also discusses how these concepts are implemented and what the repercussions of implementing these techniques are.

Literature Review

Preparation of A Capital Budget

A company is managed to meet the interests and goals of their owners. In particular, the organization of economic activities in a company, in contrast to what is available in each individual allows investments, aiming at long-term ...