Capital Budgeting Valuation - Essay Example

The paper "Capital Budgeting Valuation" is an excellent example of an essay on finance and accounting. The primary step in evaluating various investment opportunities is preparing a list of potential projects. A capital budget enumerates the investments and projects that a company strategizes to undertake during future years. Theoretical knowledge of capital budgeting differs from the real application of these skills due to various factors (Baker 10). Capital budgeting can be generally defined as methodical evaluation of how much capital to spend in one venture or asset and the exact assets companies should exploit to meet their investment objectives. This differs when it came to implementation. Most organizations are faced have limited resources and strict regulations, in addition, to a set of priorities hence a rift in implementation. Making best capital budgeting decision frequently necessitate identifying and accurate analysis of opportunities associated with the project. Inadequate assessments and decision tools jeopardize the likelihood of applying scarce resources to sections that give revenue less than the cost of capital, consequences in the destruction of value. This educational knowledge acts as a guiding principle; however, the chief financial officer may find it difficult to implement them 100 percent due to underlying factors in the organization. The popular methods used in capital budgeting include net present value, internal rate of return, profitability index, payback period and discounted payback period (Baker 120). Due to cost issues and complexity of some of the methods many organizations prefer alternatives thus hindering chief financial officers from maximizing on the methods. Monitoring of the capital budgeting is done by topmost officials of the companies. This act limits implementations of the recommendations that a chief financial officer might have instructed.