This research examines the process of business capital investment under conditions of uncertainty. Capital investment decision-making methods that accommodate conditions of uncertainty are reviewed.
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. The selection from among alternatives in the capital investment process is generally referred to as capital budgeting. Capital budgeting involves the making of investment decisions related to fixed assets and other long-lived assets.
The "capital" in capital budgeting refers to the investment of financial resources in assets, while the "budgeting" refers to the revenue inflows and outflows related to the capital investment over a specified period of time. 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.
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 selecting between alternatives. It is essential for management to have an effective and an efficient means of selecting between alternative investment proposals for two reasons. The first reason is that capital is scarce in most organizations. Scarcity requires an effective decision process for the rationing of available capital. The second reason is that most organizational investment decisions are time sensitive. To maintain timeliness in organizational activities also requires an efficient decision process. The capital budgeting process, if used effectively, provides for both the selec...