Key Concept Exercise Part A , B

Key Concept Exercise Part B Name Course Tutors Name Date Key Concept Exercise Capital budgeting The statement attributing failure of many businesses to poor capital decisions seems correct. Quick calculation on the back of an envelope is not likely to take all relevant factors into consideration. Capital investment decisions need serious attention because they commit significant amount of funds. In addition, the long term nature of capital investment decisions predisposes them to many risks. A casual approach to capital investment decisions is therefore a sign of poor resource management (Atrill McLaney, 2013). The decision on whether a capital investment decision is good or bad is premised on the net benefit expected from the investment. Since the objective of investment decisions is to maximise shareholders wealth, only investments with positive net value should be considered. Even with positive net value, not all investments can fit into the strategy of a business. For example a business with a reputation for promoting healthy lifestyles may not invest in a profitable junk foods manufacturing venture. There are several techniques for investment appraisal. Broadly, investment appraisal techniques can be put into two classes depending on their treatment of future cash flows. The first class of