Capital Budgeting
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The purpose of this research is to provide an extensive review of the literature related to capital budgeting under conditions of uncertainty. Effective and efficient decision making is important in the capital investment process, because financial resources are typically scarce. Conditions of uncertainty, competing goals, and utility tend to complicate the decision making process. Both the concept and process of capital budgeting, and specific methods employed in the capital budgeting process are covered in this review.CONCEPT AND PROCESS OF CAPITAL BUDGETING The selection from among alternatives in the capital investment process is generally referred to as capital budget ing. Capital budgeting involves the making of investment deci sions related to fixed assets and other long lived assets.1 The "capital" in capital budgeting refers to the invest ment of financial resources in assets, while the "budgeting" refers to the revenue inflows and outflows related to the capi tal investment over a specified period of time.2 Budgeting, in this perspective, also refers to the process of rationing or allocating available capital resources, when available capital resources are not sufficient to fund all desirable projects. 1 2 The purpose of capital budgeting is two fold. First, the process must determine whether or not a proposed capital investment will be a profitable one over the specified time period. Second, the proc
. . .
COV = covariance between the returns
of different securities in the
portfolio.
In the Markowitz equation, covariance is derived as follows:
COVij = RijSDiSDj, where Rij equals the correlation of
returns of different securities in
the portfolio.
The Markowitz model makes assumptions, which permits the development of a result in which a single asset or portfolio of assets is considered as efficient, if not other asset or port folio of assets offers higher expected returns with the same or lower risk or lower risk with the same or higher returns. The assumptions made by the Markowitz model are as follows:
1. Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period.
2. Investors maximize one period of expected utility, and possess utility curves which demonstrate a diminishing mar ginal utility of wealth.
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3. Individuals estimate risk on the basis of the vari ability of expected returns. The assumption should be stated in term
. . .
Some common words found in the essay are:
SUMMARY CONCLUSION, RijSDiSDj Rij, Neumann Morgenstern Model, Beta Values, Rates Return, DECISION THEORY, Efficient Frontier, Sm Risk, Leverage Financial, Market Line, capital budgeting, | |, rate return, efficient frontier, _ _, cost capital, financial management, / |, market line, _ _ _, | / |, pricing model, | | |, capital asset pricing, asset pricing model,
Approximate Word count = 8262
Approximate Pages = 33 (250 words per page)
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