How do we traditionally define capital budgeting in finance

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Assignemnt

1) How do we traditionally define capital budgeting in finance?

Capital budgeting is when you're planning to see if a long-term investment (equipment, projects, etc.) is worth what the company will be paying.

2) What is the purpose of capital budgeting in a business firm, and how is it used?

The purpose of capital budgeting is to determine whether an organization should accept or decline an investment project. There are three main methods that are taken to consideration for capital budgeting. Which are Internal Rate of Return (IRR), Payback Period, and Net Present Value (NPV). Companies use methods like these to make that decision if that investment is worthwhile. Most companies would want a minimum rate of return. If it's determined that the company would make a positive investment and meet its minimum requirement then they would proceed with it.

After Videos:

1) Navistar Trucking has adopted a new approach to capital budgeting. What is the fundamental way in which the new approach differs from the traditional approach?

The new approach consists of looking at the shareholder value. Which focuses more on increasing the value of the shareholders. Which is usually the main goal of an organization. One of the differences is instead of rewriting a capital budget every year, it is done now for a bigger planning cycle. They try to plan for 5 to 10 years.

2) What is the goal of the new approach of capital budgeting?

The goal of the new approach of capital budgeting is to include the capital budgeting with the company's business plan. With combining two, it will make it easier to complete the company's overall goals.

3) Under what circumstances would a business firm drop a project chosen through the new capital budgeting approach?

Just like any reason to drop a project or investment is because of not returning its full potential. A company normally has requirements of a return it would want to receive. If the project is leaning towards of being successful then its most likely to keep the project going.

Reference:

Three Primary Methods Used to Make Capital Budgeting Decisions. (n.d.).

Reference no: EM131548356

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