Capital Budgeting
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MASTER of BUSINESS ADMINISTRATION
ECONOMICS FOR MANAGERS
MTKM 5033
CAPITAL BUDGETING
BY; MOHD FIRDAUS IBRAHIM M061310005
NORZAHFRAN NORJAMAL M061310034
ABU HANIFAH BIN A. JALAL M061310004
INSTRUCTOR;
DR. SENTOT IMAM WAHJONO
Table of content Page___
CAPITAL BUDGETING DEFINED 3 Categories of investment
THE CAPITAL BUDGETING PROCESS 4
CAPITAL BUDGETING DECISION RULES 5
New project decision rules of capital budgeting Replacement project (Build versus remodel)
CHOOSING AMONG ALTERNATIVE PROJECTS 13 Reasons for Decision Rule Conflict Ranking Reversal Problem Making the Correct Investment Decision
COST OF CAPITAL 17 Component Cost of Debt Component Cost Of Equity Weighted – Average cost of Capital (WACC)
OPTIMAL CAPITAL BUDGET 19 Marginal Cost of Capital
The Post-Audit
Case Study 1 21
Case Study 2 22
References 23
CAPITAL BUDGETING DEFINED
The term Capital refers to the funds employed to finance business; a budget is a detailed plan of projected inflows and outflows over future periods. Capital Budgeting is planning expenditures that generate cash flows expected to stretch beyond one year. Process of planning expenditures that rise to revenues or returns over a number of years.
Categories of investment • Replacement Investments • Cost Reduction Investments • Output Expansion to Accommodate Demand Increases • Output Expansion for New Products • Government Regulation
In general, firms classify investment projects into the following categories: 1. Replacement: Investments to replace equipment that is worn out in the production process. 2. Cost reduction. Investments to replace working but obsolete equipment with new and more efficient equipment, expenditures for training programs aimed at reducing labor costs, and expenditures to move production
MASTER of BUSINESS ADMINISTRATION
ECONOMICS FOR MANAGERS
MTKM 5033
CAPITAL BUDGETING
BY; MOHD FIRDAUS IBRAHIM M061310005
NORZAHFRAN NORJAMAL M061310034
ABU HANIFAH BIN A. JALAL M061310004
INSTRUCTOR;
DR. SENTOT IMAM WAHJONO
Table of content Page___
CAPITAL BUDGETING DEFINED 3 Categories of investment
THE CAPITAL BUDGETING PROCESS 4
CAPITAL BUDGETING DECISION RULES 5
New project decision rules of capital budgeting Replacement project (Build versus remodel)
CHOOSING AMONG ALTERNATIVE PROJECTS 13 Reasons for Decision Rule Conflict Ranking Reversal Problem Making the Correct Investment Decision
COST OF CAPITAL 17 Component Cost of Debt Component Cost Of Equity Weighted – Average cost of Capital (WACC)
OPTIMAL CAPITAL BUDGET 19 Marginal Cost of Capital
The Post-Audit
Case Study 1 21
Case Study 2 22
References 23
CAPITAL BUDGETING DEFINED
The term Capital refers to the funds employed to finance business; a budget is a detailed plan of projected inflows and outflows over future periods. Capital Budgeting is planning expenditures that generate cash flows expected to stretch beyond one year. Process of planning expenditures that rise to revenues or returns over a number of years.
Categories of investment • Replacement Investments • Cost Reduction Investments • Output Expansion to Accommodate Demand Increases • Output Expansion for New Products • Government Regulation
In general, firms classify investment projects into the following categories: 1. Replacement: Investments to replace equipment that is worn out in the production process. 2. Cost reduction. Investments to replace working but obsolete equipment with new and more efficient equipment, expenditures for training programs aimed at reducing labor costs, and expenditures to move production
References: : 1. Hirschey,M., (2009)., Managerial Economics. (12th Ed), South Western 2. Capital budgeting practices in the Jordanian industrial corporations. International Journal of Commerce and Management Vol. 20., No. 1, 2010., pp. 49-63., Emerald Group Publishing Limited., 1056-9219., DOI 10.1108/10569211011025952 3. Shaari Isa (1994)., Belanjawan Modal., Dewan Bahasa dan Pustaka 4. www.investopedia.com 5. http://www.myinvestment101.com/capital-budgeting/weighted-average-cost-of-capital.html