Uncertainity & Capital Budgeting
This is an excerpt from the paper...
This research provides 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 process must provide management with a means of sel
. . .
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.
15
3. Individuals estimate risk on the basis of the vari ability of expected returns. Reilly stated that "it would be more appropriate to state the assumption in terms of expected variability, since the model relies on estimated values over the assumed holding period."43
4. Investors base decisions solely on expected return and risk their utility curves are a function of expected return and variance (standard deviation) of returns only. Reilly pointed out that the use of "variance as a measure of risk obviously assumes that the variance of returns exists."44
5. For a given risk level, investors pr
. . .
Some common words found in the essay are:
SUMMARY CONCLUSION, Efficient Frontier, RijSDiSDj Rij, Neumann Morgenstern Model, Rates Return, DECISION THEORY, Leverage Financial, CAPITAL BUDGETING, Value Money, Cost Capital, capital budgeting, rate return, cost capital, efficient frontier, financial management, pricing model, asset pricing, capital asset, capital asset pricing, net value, asset pricing model, fixed interest debt, internal rate return, project profitability index, financial management spring,
Approximate Word count = 8408
Approximate Pages = 34 (250 words per page)
|
Customer Service
to Over
32,000 Professionally Written Papers!!!
