Capital Expenditure

Group #4

Case Study

CAPITAL EXPENDITURE DECISION do IN SMALL FIRMS



The allocation of the seat of government in petite firms is as strategic as it is large ones. In fact, given(p) their lack of access to the capital markets, it is often more important in the fiddling firm beca mapping the funds necessary to temper mistakes whitethorn not be available. Also, large firms with capital budgets of $ c million or, more allocate capital to numerous projects, so a mistake on one project fecal matter be offset by success in others. 


In spite of the importance of capital expenditures to itsy-bitsy business, studies of the way capital budgeting decisions argon made generally suggest that many miniature firms use back-of-the-envelope summary or perhaps no analysis at all. For example, L. R. Runyon studied 214 firms with net worth of from $500,000 to $1,000,000 he put out that al almost 70% relied upon either payback or some other questionable criteria; only 14% apply a discounted cash flow analysis; and about 9% indicated that they used no formal analysis at all. Studies at longer firms, on the other hand, generally find that most analyze capital budgeting decisions using discounted cash flow techniques. 


We are left with a puzzle.



Capital budgeting is clearly important to small firms, yet their firms tend not to use tools that have been develop to improve capital budgeting decision. Why does this situation exist? star argument is that managers of small firms are simply not comfortably trained; they are unsophisticated. This argument suggests that the managers would make greater use of sophisticated techniques if they understood better. 


Another argument relates to the fact that caution talent is a scarce resource in small firms. That is, even if the managers were exceptionally sophisticated, the demands on their time may be such that they simply cannot take the time to use rectify techniques to analyze proposed projects. In other words, small business managers may be...If you want to get a full essay, order it on our website: Orderessay



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