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Rock Street, San Francisco

Importance of Selecting the Right
Projects

When discussing investments, we’re also
discussing money being spent, in order to determine the best possible outcome,
it is extremely important that organization select the right project in which
to invest capital. Capital Budgeting is intended to help determine the most
effective investment decisions for the company, as the ultimate aim is to
maximize wealth of the shareholder by acquiring assets. According to Capital
Investments (n.d.), “The company ought to decide as to which of the capital
investments that are given, would ensure the maximum value to their business
and thus they can make their capital investment decision”.

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Highest Return on Investment

The highest rate of return, is not
necessarily going to be the most effective
rate of return, nor the best option for an organization simply because more
money is made. More money can lead to a plethora of other factors and actually
become more problematic for the company in some situations (e.g. taxes or
risks). According to Updegrave (2017), of CNNMoney, states “The higher the
return an investment purports to offer, the riskier it’s going to be, even if
that risk isn’t immediately apparent”. Higher return on investment only means
higher potential risks, simply because a company can make more money on one
project over another does not mean it is the most viable or most financially
appropriate decision for the company to make.

Factors that Play into Capital
Budgeting

Capital budgeting tells financial
managers how a company is doing economically. Understanding the capital budget
provides a clearer understanding of the financial status of the enterprise and
gives financial managers the tools to understand and present the financial
health of a company. Capital budgeting deals with investment decisions made
over a period of time and is useful in estimation of future benefits from
investment proposals. This information can be used in a variety of ways to make
sound business decisions.

Capital budgeting contributes a variety
of data throughout its process such as formulating long-term strategic goals,
estimations and forecast of future cash flows. Factors that contribute to these
findings can include the structure of the company’s capital, or their taxation
policy. Other areas can aid the capital budgeting process such as availability
of funds, and economic value of the project. Additionally, companies need to
consider non- quantitative
factors when undergoing capital rationing as well. For instance, the company’s
culture, environmental concerns, and/or products/services they offer may affect
the company’s decisions to undergo a specific investment project.

Dividend Policy

A portion of the company’s earnings
earned from investment projects are given back to stockholders that have
contributed to the investment project, these are known as dividends. According
to Byrd, Hickman & McPherson (2013), dividends are defined as “Payments
made to stockholders by the corporations”. Some of the benefits to paying
dividends are they are attractive to investors and keep them happy, this could
play a huge role in the return of those stakeholders for future investment
projects. These stakeholders are basically reinvesting their money which could
entice them to return to do it again. Additionally, dividends offer a return on
low-risk investments and have the ability to grow, generating more value
appealing to investors even more.  

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