PDF Ebook Capital Budgeting In A Capital-Intensive Industry
Capital budgeting is the process of allocating capital within a firm. This is done to determine the long-term investments that secure the continuity and profitability of the company. The process of capital budgeting is sometimes referred to as investment appraisal1. By nature, capital budgeting is a process of planning, and the implementation and monitoring activities are omitted from this analysis. This planning process typically includes the use of a variety of investment appraisal methods, which can be both quantitative and qualitative. These methods may be divided into five; net present value, rate of return, ratio, payback and accounting methods (Remer and Nieto 1995a, 1995b).
Capital-intensive industries, such as forest industry, hold some special characteristics in their capital budgeting procedures. In Western paper companies, the currently dominant production philosophy called 'multi-product integrate', emphasises the economies of scale achieved by an integrated paper mill (Ryti 1987). High amount of capital embedded in the organisational structures and industrial infrastructure leads to capital-intensiveness, and further to long payback periods and high gross capital expenditure levels. This factor accentuates the importance of using proper investment appraisal techniques, as the competitiveness of the company greatly depends on the efficiencies thus achieved.
The purpose of this study is to explore literature on capital budgeting in large corporations in capital-intensive industries. Subsequently, analysis of methods that are widely incorporated in multinationals, how they are used and what should possibly be taken into account in the future, is conducted.
After this introductory part, the fundamental methods, as well as practical aspects of capital budgeting are presented and discussed in more detail. Next, capital budgeting in forest industry is presented. The final section introduces a heuristic model that seeks to capture the relevant issues in the industry.
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PDF Ebook Capital Budgeting In A Capital-Intensive Industry
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