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UBC Theses and Dissertations

Capital budgeting. Duclos, Gerard George

Abstract

Capital budgeting is a form of systematic planning of expenditure in order to achieve sound investment programs which fulfill management's trusteeship obligations; the care and effective use of those funds entrusted to them by their shareholders and investors. Capital budgeting is the technique of administering a capital management program. It includes many areas beginning with the creative search for profitable opportunities and ending with retirement and disposal of assets. Between these two decisions lie a host of others all of which are the subject of this thesis: long and short range capital plans, measurement of project worth, screening and selection of alternate proposals. The study has been developed through four major areas: demand, supply, and cost of capital, and evaluation of capital expenditure proposals. This comprises a well defined concept of capital budgeting about which much has already been written. In addition to drawing this material together, Capital Budgeting seeks to evaluate the concept as a tool of practical business. How valuable is this approach to practicing management? While it seems logical to expect that much use would be made of the concept of capital budgeting; in fact, business has found some limitations in its use, particularly with the return on investment criterion. In fact, substantially less use of this approach is being made than might have been expected in view of the enthusiastic promotion it has received in the accounting literature of recent years. Capital budgeting procedures are no panacea for management's problems, nor are they a substitute for good judgment. All factors influencing a decision cannot be reduced to quantitative formulae and any reliance on such seemingly meaningful arithmetic manipulations to the exclusion of the exercise of sound judgment will lead to serious problems. In particular the return on investment criterion as an aid to measurement and evaluation of capital expenditure decisions has an important and valuable contribution to make, but must be viewed in the perspective of the total of all factors to be considered. Those who claim that such a criterion can embrace all factors, that is, meet the test of all-inclusiveness, are misled and cannot but be disillusioned at the shortcomings of such an attempted evaluation.

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