Part 2 book “Accounting and finance for the nonfinancial executive” has contents: How to manage inventory, understanding the concept of time value, capital investment decisions, how to analyze and improve management performance, how taxes affect business decisions, understanding financial statements, analyzing financial statements, and other contents. | 12 Capital Investment Decisions Capital budgeting is the process of making long-term investment decisions. These decisions should be made in light of the company’s goals. The stockholders have entrusted the company with their money and they expect the firm to invest it wisely. Investments in fixed assets should be consistent with the goal of maximizing the firm’s market value. There are many investment decisions that the company may have to make in order to grow. Examples of capital budgeting applications are product line selection, keep-or-sell a business segment decisions, lease or buy decisions, and determination of which assets to invest in. To make long-term investment decisions in accordance with your goal, you must perform three tasks in evaluating capital budgeting projects: (1) estimate cash flows; (2) estimate the cost of capital (or required rate of return); and (3) apply a decision rule to determine if a project is “good” or “bad.” This chapter discusses: • • • • • • The types and special features of capital budgeting decisions. Basic capital budgeting techniques. How to select the best mix of projects with a limited capital spending budget. How income tax factors affect investment decisions. The types of depreciation methods. The effect of the Modified Accelerated Cost Recovery System (MACRS) on capital budgeting decisions. • How to compute a firm’s cost of capital. WHAT ARE THE TYPES OF INVESTMENT PROJECTS? There are typically two types of long-term investment decisions made by your company: 1. Selection decisions in terms of obtaining new facilities or expanding existing facilities. Examples include: (a) Investments in property, plant, and equipment as well as other types of assets. (b) Resource commitments in the form of new product development, market research, introduction of a computer, refunding of long-term debt, etc. (c) Mergers and acquisitions in the form of buying another company to add a new product line. Also see Chapter 17. 2. .
