7/24/2019 Factors to Be Considered in Capital Budgeting Decisions

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FACTORS TO BE CONSIDERED IN CAPITAL BUDGETING DECISIONS

Capital budgetingis the process of planning and controlling investments for long-term projects and programs.

The costs that are considered in capital budgeting analysis include:

1. Avoidable cost cost that may be eliminated by ceasing an activity or byimproving efficiency.

2. Common cost cost that is shared by all options and is not clearly allocable toany one of them.

3. Weighted-average cost of capital is the weighted average of the interestcost of debt (net of tax) and the implicit cost of e!ity capital to be invested in long-term assets. "t represents a re!ired minim!m ret!rn of a new investmentto preventdil!tion of owners# interest.

$. Deferrable or Postponable cost cost that may be shifted to the f!t!re with

little or not effect on c!rrent operation.%. Fixed cost cost that does not vary with the level of activity within the relevant

range.

&. mputed cost cost that does not entail a specified peso o!tlay formallyrecogni'ed by the acco!nting system b!t its nevertheless relevant to establishing theeconomic reality analy'ed in the decision-maing process.

*. ncremental cost is the difference in cost res!lting from selecting one optioninstead of another.

+. !pportunity cost is the benefit forgone by not selecting thebest alternative!se of scarce reso!rces.

,. "elevant cost f!t!re differential cost that vary with the action.1. #un$ cost cost that cannot be avoided beca!se expendit!re or an irrevocable

decision to inc!r the cost has been made.

11. Taxes taxconse!ences of an investment.

FACTORS AFFECTING CAPITAL BUDGETING:

Availability of Funds Working Capital

Structure of Capital Capital Return

Management decisions Need of the project

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7/24/2019 Factors to Be Considered in Capital Budgeting Decisions

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Accounting methods overnment policy

!a"ation policy #arnings

$ending terms of financial institutions #conomic value of the project