Sample Essay On Operating Budget

The funds, that are invested in a company in order to increase or promote the objective of the business organization, is known as capital investment. This can also involve the acquisition of fixed assets such as machinery or plant that is expected to be lucrative and productive for the business organization for many years (Khan et al., 2005).
The cost of capital is an essential part of the capital investment proposal. It provides the main yardstick to evaluate the main worth of the capital investment proposal and thus plays a major role if the manager will want to accept or reject the capital investment proposal. One of the main reasons why the capital investment proposal can be rejected or accepted by the manager is based on the rate of return. It is imperative that the investment should offer a higher rate of return than the cost of capital. On the other hand, if the shareholder wealth will decrease as the capital investment does not offer high rate of return in comparison to the cost of capital than the proposal will be declined (Khan et al, 2005).
Another reason that can impact the manager's decision is the payback period. The manager or board will prefer that the payback period is less of the new capital investment venture so that the investors are satisfied, and the shareholders receive their due share on a timely manner. If the payback time is higher than expected, then the manager or board has the authority to reject the capital investment proposal (Khan et al., 2005).
Third reason that can lead to acceptance or rejection of the capital investment proposal is the Accounting Rate of Return (ARR) that calculates the return from the net income of the capital investment. If the ARR is greater or equal to the desired or projected rate of return than the manager or board will accept the capital investment proposal or else it will be rejected (MJ du Toit et al, 2005).

References

Khan and Jain (2005) Basic Financial Management Tata McGraw Hill Education.
MJ du Toit and A Pienaar (2005) A review of the capital budgeting behavior of large South African firms Meditari Accountancy Research Vol.13 No 1; pp.19-27.