Capital Budgeting Statistics Project Example | Topics and Well Written Essays - 5250 words

Capital Budgeting - Statistics Project Example One of the most important considerations for an investment and financing decision will be proper asset-liability management. Companies will have to face a severe asset-liability mismatch if the long-term requirements are funded by the short-term sources of funds. Such a mismatch will lead to an interest risk thereby enhancing the interest burden of the firm and a liquidity risk with the short-term funds being help up in long-term projects. Whenever a business firm plans to invest in a long-term project, it needs to assess the benefits that can be reaped out from that particular long-term investment and come to a conclusion whether that particular investment is profitable for the business or not. The entire process of assessing a proposed long-term investment and coming to a conclusion whether it is worth investing or not is termed as "Capital Budgeting." The ultimate goal of any individual or a firm's maximization of profits or rate of returns - in other words market value of one's investments. Thus, investment management is an ongoing process which needs to be constantly monitored by way of information as this may affect the value of securities or rate of returns of such securities. ... c. Estimate of future profitability and growth and the reliability of such expectations. d. Translation of all these estimates into valuation of the company and the securities. The global financial markets now-a-days are getting more integrated, and people and firms are entering into more and more cross - border financial deals. In order to make these transactions feasible, a system for determination of the amount and method of payment of the underlying financial flows is needed. Since the domestic currencies of the parties involved will be different, the flows will take place in some mutually acceptable currency. All the relevant transaction taking place would hence be on account of international trade in goods or services, or due to acquisition or liquidation of financial assets, or because of creation or repayment of international credit. Measurement of Total risk Undoubtedly, all the modern forms of risk quantification find their origins in Risk is associated with the dispersion in the likely outcomes. Dispersion refers to variability. If an asset's return has no variability, it has no risk. An investor analyzing a series of returns on an investment over a period of years needs to know something about the variability of its returns or in other words the assets' total risk1. There are different ways to measure variability of returns. The range of the returns, i.e. the difference between the highest possible rate of return and the lowest possible rate of return is one measure, but the range is based on only two extreme values. The variance of an asset's rate of return can be found as the sum of the squared deviation of each possible rate of return from the expected rate of return