Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small Business

CHAPTER 13 INVESTMENT PROJECT EVALUATION AND RISK MANAGEMENT

ALL FIRMS, large and small, would at some point have to make some sort of long-term investment. In addition to the commonly known investment in financial securities, firms are often engaged in a more important investment that is crucial to their operations and survival. That is the investment in both current and fixed assets, which takes a variety of forms and sizes and shapes. As the effectiveness of current assets is tied to the operating cycle within a year, current expenditures is defined as the outlay which would reap in benefits during a year, such as the account receivable, prepaid expenses, and inventory. Fixed assets, on the other hand, are those assets that would serve the operations over a prolonged period of time, extending beyond a year and for many operating cycles. Therefore, the outlay of funds that is expected to continue to reap services for the long run is called capital expenditures. Since firms are usually involved in investment allocation of both assets, a systematic process is needed to enable the firm to evaluate and select the right investment at the right time and according to the firm's priorities.

Investment project evaluation is the firm's internal process to prioritize, assess, select, and allocate funds for the long-term investment in its assets to achieve its goals. Capital budgeting is a similar concept about the process to justify and use the capital expenditures to generate higher ...