Chapter 65. The Investment Problem and Capital Budgeting

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

PAMELA P. DRAKE PhD, CFA

J. Gray Ferguson Professor of Finance and Department Head of Finance and Business Law, James Madison University

Abstract: Corporate financial managers continually invest funds in assets and these assets produce income and cash flows that the company may then either reinvest in more assets or distribute to the owners of the company. Capital budgeting decisions involve the long-term commitment of a company's scarce resources in capital investments. These decisions play a prominent role in determining whether a company will be successful. The commitment of funds to a particular capital project can be enormous and may be irreversible. Whereas some capital budgeting decisions are routine decisions that do not change the course or risk of a company, there are strategic capital budgeting decisions that will either have an impact on the company's future market position in its current product lines or permit it to expand into a new product line in the future.

Keywords: capital budgeting, project, capital investment, working capital owners, wealth maximization, project tracking, postcompletion audit, replacement projects, expansion projects, mandated projects, independent projects, mutually exclusive projects, contingent projects

Companies continually invest funds in assets, and these assets produce income and cash flows ...

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