Capital Budgeting and Comparisons of Its Three Alternatives

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Companies may need to make strategic decisions on whether to buy a new building, new equipment, to extend the building a few floors up, or even to make major repairs on its buildings and factory sites. Also, capital investment involves both stock investments and bond contracts. Bond contracts are loans to creditors that are usually paid in monthly or quarterly installments.illiquidity? How should responsible business managers use these concepts? Is there a connection between them, and if so, what is this connection? Each of the two pairs of concepts is complementary–each pair forms a whole. And when we search for scientifically viable definitions of these basic concepts, we discover that a debtor who is illiquid is a debtor who is temporarily unable to pay his or her debts, whereas the insolvent debtor is permanently unable to pay his or her debts. Time is thus an element in the concepts. A problem of invisibility arises with regard to solvency/insolvency because the solvency or insolvency of business enterprises is not apparent in traditional financial statements, even though such statements claim to give a true and fair view. Consequently, traditional financial statements are worthless as a means of describing the financial position of business enterprises.(Kirdegaard, 1997, p.39)Using the time value of money approach, the total first-class airline tickets bought at $.1,300 less the flier discount of $200 would be translated to the following data below. The total tickets from year 1 to year 10 are $2,807,200 as indicated in the above computation. The present value of the $2,807,200 is $1,917,843. This is computed because the company has entered into a ten-year contract with the airline company resulting in a flier discount. The difference between the cost and present value is $889,357.04 or thirty-two percent (32) of the cost of ten-year contract tickets. This is the amount that the company will save if this alternative is chosen(Ross, 1996.p179-206).