Importance of Selecting the RightProjectsWhen discussing investments, we’re alsodiscussing money being spent, in order to determine the best possible outcome,it is extremely important that organization select the right project in whichto invest capital.
Capital Budgeting is intended to help determine the mosteffective investment decisions for the company, as the ultimate aim is tomaximize wealth of the shareholder by acquiring assets. According to CapitalInvestments (n.d.), “The company ought to decide as to which of the capitalinvestments that are given, would ensure the maximum value to their businessand thus they can make their capital investment decision”.Highest Return on InvestmentThe highest rate of return, is notnecessarily going to be the most effectiverate of return, nor the best option for an organization simply because moremoney is made. More money can lead to a plethora of other factors and actuallybecome more problematic for the company in some situations (e.
g. taxes orrisks). According to Updegrave (2017), of CNNMoney, states “The higher thereturn an investment purports to offer, the riskier it’s going to be, even ifthat risk isn’t immediately apparent”. Higher return on investment only meanshigher potential risks, simply because a company can make more money on oneproject over another does not mean it is the most viable or most financiallyappropriate decision for the company to make. Factors that Play into CapitalBudgetingCapital budgeting tells financialmanagers how a company is doing economically. Understanding the capital budgetprovides a clearer understanding of the financial status of the enterprise andgives financial managers the tools to understand and present the financialhealth of a company. Capital budgeting deals with investment decisions madeover a period of time and is useful in estimation of future benefits frominvestment proposals. This information can be used in a variety of ways to makesound business decisions.
Capital budgeting contributes a varietyof data throughout its process such as formulating long-term strategic goals,estimations and forecast of future cash flows. Factors that contribute to thesefindings can include the structure of the company’s capital, or their taxationpolicy. Other areas can aid the capital budgeting process such as availabilityof funds, and economic value of the project. Additionally, companies need toconsider non- quantitativefactors when undergoing capital rationing as well. For instance, the company’sculture, environmental concerns, and/or products/services they offer may affectthe company’s decisions to undergo a specific investment project.Dividend PolicyA portion of the company’s earningsearned from investment projects are given back to stockholders that havecontributed to the investment project, these are known as dividends. Accordingto Byrd, Hickman & McPherson (2013), dividends are defined as “Paymentsmade to stockholders by the corporations”.
Some of the benefits to payingdividends are they are attractive to investors and keep them happy, this couldplay a huge role in the return of those stakeholders for future investmentprojects. These stakeholders are basically reinvesting their money which couldentice them to return to do it again. Additionally, dividends offer a return onlow-risk investments and have the ability to grow, generating more valueappealing to investors even more.