Abstract
This chapter discusses the basic principles of investment appraisal. It presents an investigation of the different long- and short-term sources of funds available to a company so that an appropriate financing mix can be chosen. Funds can be used for either short- or long-term purposes. The short-term use of funds to build up stocks, provide customers with more credit, etc., is the subject of working capital management. The long-term allocation of funds to major capital investment projects is known as capital budgeting. An accountant distinguishes between revenue and capital expenditures. The former are charged against profits as soon as they are incurred; the latter are capitalized, shown on the balance sheet as fixed assets, and often depreciated over a period of time. Any long-term major allocation of funds is considered to be a capital investment.
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