ABSTRACT
This chapter discusses the vital role top management plays in capital investment decisions, the classifications and process of capital investments, the methods of financing, and an example illustrating how debt can reduce the average weighted cost of capital. It discusses the estimated after-tax payback period and the estimated return on investment using a discounted cash flow technique such as the internal rate of return. Decisions on capital investments are extremely important to the continuous success of the company, and therefore top management usually assumes direct responsibility for the larger and more important expenditures. Once the commitment is made, or more importantly, once the project becomes operational and is showing poor results, it is quite difficult to reverse the original decision to invest. The capital program is important because it provides the necessary recovery of funds to overcome the replacement of assets and, more important, provides the necessary funds in future years and excess funds for growth.
