© 2000 John Petroff
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© 2000 John Petroff |
Capital budgeting is a planning methodology for undertaking major projects which require large capital outlays. A significant proportion of financial analysis within a firm is conducted in this context of capital budgeting. The following seven subsections review the fundamental decision methods of capital budgeting which should already be familiar from corporate finance. They are presented here because they are at the heart of much of the financial analysis that follows, for instance in mergers discussed in Chapter 4 Section H and in fixed assets planning outlined in Chapter 10 Section E.
Each project a company plans, can be looked upon as an investment in the same light as a portfolio investment (see Chapter 2 Section E). In other words, an entire company is the sum of its projects, or a portfolio of projects. Thus, the valuation of individual projects bears much similarity with valuation of other financial assets. Capital budgeting is an embodiment of corporate strategy formulation which is sketched in Chapter 4 Section J. Application of capital budgeting is presented in the context of fixed assets analysis in Chapter 10 Section E.
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