What is Capital budgeting?
Capital Structure:
- Is the process used by a company to select real assets (projects) to invest in
- Is essentially the process used to decide on the optimum use of scarce resources
Key consideration:
- whether or not the proposal provides an adequate return to investors
- Which real assets should the firm invest in, in order to maximise its market value
There are three stages in making capital budgeting decisions:
- Stage 1 is the forecasting of costs and benefits associated with a project – the most important being the financial ones
- Stage 2 involves the application of an investment evaluation technique to decide whether a project is acceptable, or optimal amongst a set of alternative projects
- Stage 3 is the ultimate decision to accept or reject a project