Principles of Managerial Finance, 15th Edition

10.1 Overview of Capital Budgeting

1. LG1

Long-term investments represent sizable outlays of funds that commit a firm to some course of action. Consequently, the firm needs procedures to analyze and select its long-term investments. Capital budgeting is the process of evaluating and selecting long-term investments that contribute to the firm’s goal of maximizing owners’ wealth. Firms typically make a variety of long-term investments, such as investments in fixed assets, which include property (land), plant, and equipment, and investments in research and development. These assets, often referred to as earning assets, generally provide the basis for the firm’s earning power and value.

When undertaking large investments, firms typically have to ...