Normally capital budgeting decisions are made for replacement of worn out or obsolete machineries.
alternate financial plans
Normally capital budgeting
decisions are made for replacement of worn out or obsolete machineries. In case
the machineries have not worn out but they have not contributing optimum
production quantities, such replacement decisions may also be made.
Sometimes capital budgeting
decisions are made for modernization of the plant and machinery. They are also
made for replacing manually operated machineries with totally automated
machineries. Most of the times, the plant and machinery may need latest
technological up gradation.
If they are not technologically
up graded, the companies may lose out to those companies which have gone for
latest generation technologies as it is always observed latest technology
normally result in cost of production going down and naturally the companies
which opt for latest technology would be able to better quality products at
comparatively lower cost.
Many times companies will need to
made capital budgeting decisions to take care of their expansion programmes to
meet growing existing market requirements. They are also made to penetrate into
newer markets – regionally and globally.
Having achieved name and fame in
the market with their quality products, companies may take up diversification
programmes to enlarge their business operations. Capital budgeting decisions
are made for them also.
The funds needed to meet these
capital budgeting decisions can be met through either internal funds generated
(by retaining earnings in the previous years) or through debts and financing by
banks and financial institutions. Sometimes they are also met through raising
fresh external equity
These capital structure decisions
will also require reviewing and analysing
1. Existing capital structure
2. Desired debt-equity mix
3. Pay out policy
Moving over to desired debt –
equity mix of any capital structure decisions, a company will need looking into
its effect on future returns and effect on risk, both of which will impact the
cost of the capital. The cost of capital decides the optimum capital structure
and this will facilitate evaluating the value of the firm.
Tags : Financial Management - CAPITAL STRUCTURE THEORIES
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