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    Capital Budgeting Purposes

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    What are the purposes of capital budgeting? What factors influence a capital budgeting analysis, and how do they influence it? How is capital budgeting used in your organization? How does the time value of money influence financial decisions made by your organization?

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    * Capital Budgeting is the process of determining which potential long-term projects are worth undertaking, by comparing their expected discounted cash flows with their internal rates of return.

    * The purpose of the Capital Budgeting is to facilitate the process of planning and financing capital projects to keep the senior officers and Board members apprised of the resources, expenditures, and management decisions associated with capital.

    * Investopedia (n.d.) references the factors that influence a capital budgeting analysis, which are:

    1.Business risk
    2.Company's tax exposure
    3.Financial flexibility
    4. Management style
    5.Growth rate
    6.Market Conditions

    1.Business Risk
    Excluding debt, business risk is the basic risk of the company's operations. The greater the business risk, the lower the optimal debt ratio.

    2.Company's Tax Exposure
    Debt payments are tax deductible. As such, if a company's tax rate is high, using debt as a means of financing a project is attractive because the tax deductibility of the debt payments protects some income from taxes.

    3. Financial Flexibility
    This is essentially the firm's ability to raise capital in bad times. It should come as no surprise that companies typically have no ...

    Solution Summary

    The purpose of capital budgeting is discussed. An analysis of capital budgeting influences is given.