Corporate Financial Management: Techniques, Issues and Problems

Running Head: CORPORATE FINANCIAL MANAGEMENT
CORPORATE FINANCIAL MANAGEMENT
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1CORPORATE FINANCIAL MANAGEMENT
Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Capital Budgeting...................................................................................................................2
Techniques of the Capital Budgeting.....................................................................................3
Issues and Problems of Capital Budgeting Techniques.........................................................6
Conclusion and Recommendations............................................................................................7
Reference....................................................................................................................................9

2CORPORATE FINANCIAL MANAGEMENT
Introduction
The budgeting of Capital or the appraisal of investment is referred as the process of
the planning that is used for determining whether the investments of long-term of the firm
such as replacement of the machinery, projects of research development, new machinery as
well as new products are worth for funding of cash by structure of the capitalization of
company. It is the formal process of the company that is used by the company for the
evaluation of the potential expenditure or the investments, which are significant in the
amount. It is the method, which involves current funds for the disposition, addition,
replacement or modification of the fixed assets (Rossi 2014).
However, unfortunately, precision of the theory has been increased that has tended
towards obscuring certain basic issues and problems, which are involved in the decisions of
the capital budgeting. These obscuring factors includes lack of the satisfactory that means
estimation of the relative degrees of the uncertainty of the benefits, circularity of the
reasoning in the estimation of the costs of the capital as well as failure for recognizing the
expectations as well as risks that is perceived by the internal management are same as of the
investors. Therefore, in this assignment, analysis will be on the sensitivity, break-even
analysis, scenario analysis in the making of capital decisions. Moreover, discussion will also
be done on the issues and the problems that are relating to the techniques of capital
budgeting.
Discussion
Capital Budgeting
The term of capital budgeting is made up of the two words that is capital and the
budgeting. The capital budgeting, in this context is the defined as spending of the funds for
the large expenditures such as expansion, purchasing of the fixed assets and the equipment,

3CORPORATE FINANCIAL MANAGEMENT
repairing of the equipment or the fixed assets as well as research and the developments.
Moreover, the term budgeting is defined as the process of setting the targets for the projects
for ensuring the maximum profitability. It includes processes of the evaluation of the
investments as well as huge expenses for obtaining the best results on the investments. Most
often, organizations faces the challenges of the selection between the two investments or the
projects or for buying or replacing the decisions. In the ideal situation, the organization wants
to invest in all profitable projects (Andor, Mohanty and Toth 2015). However, because of
limitations on capital availability, the organization requires for choosing between the various
investments or the projects. Capital budgeting is considered as the huge as well as having the
long-term effect. Hence, when performing the analysis of the capital budgeting, the
organization requires for keeping in mind certain objectives. These objectives include
selection of the projects that is right mix of the profitable projects. This helps in increasing
the wealth of the shareholders, controlling of the capital expenditure as well as finding of the
right sources of the fund by the help of balancing the costs of the borrowing as well as returns
on the investments (Daunfeldt and Hartwig 2014).
Techniques of the Capital Budgeting
In order for assisting the organization for the selection of the best investment, there
includes different available techniques that are based on the comparison of the cash-inflows
as well as the outflows. Further, the techniques of the capital budgeting are used for
determining those projects that would yield best returns over the applicable period (Bromiley
et al. 2015).
Sensitivity Analysis
The sensitivity analysis is referred as analysis regarding how much sensitive is the
result of capital budgeting techniques is towards variable. This analysis is considered most