Planning and Controlling Capital Expenditures Essay

Planning and Controlling Capital Expenditures - Essay Example and then most companies hold on great(p) expenditures every year, in an attempt to continuously upgrade and improve things like facilities, vehicles, buildings and equipment. A large(p) expenditure is considered deductible since it represents an improvement to the business and this deducted takes place over a specific life of an item, after than all at once as in the case of repair or maintenance expenditures.Sometimes it is sticky to determine the difference that exists in capital expenditure and a routine expense. Generally capital expenditure improves the worth of an asset while if it keeps the asset in working condition, it is referred to as routine expense. Hence, engaging in capital expenditure is a routine way of upgrading and expanding business whether done on a diminutive scale or on a large scale (Pike and Neale, 2003). Large firms or corporations may acquire extra companies, as in the case of automotive gi ant which purchases another car manufacturer. Consequently, allowances are made in the budget of the company for the capital expenses, including the ones involving the replacement of items which are no longer repaired.Capital expenditures thereof normally yield benefit over a long period of time resulting into fixed assets. The resource constraint is a frequent phenomenon of all the stintingal activities in business. In addition, when a firm is able to spend on specific items it is not willing to do so (Nice, 2002). Therefore, a systematic back is established to accept or reject the investment proposal. Investment proposal are divided into two groups that is Mutually sole(a) proposals and independent proposals. Mutually exclusive proposals are proposals that have an alternative of doing the same thing. If one alternative is selected then the other one must be rejected for example if in botany material facilities are required, they are grouped according to their economic benefit s. The economic benefits of from each one of the proposal will be evaluated and the one with the contributing maximum economic benefits is chosen while the rest with less economic benefits are rejected (Pike and Neale, 2003). Independent proposals are those items of capital expenditures that are always considered for different types of projects whose accomplishments are passing needed. In this case all independent proposals are independent of each other and are worthy for implementation. However, due to financial difficulties, priorities are assigned to each proposal according to the gravity of the need of the organization for example in line with the material handling equipments, instruments such as machines for weighing, packing, stamping may be required(Cotts, 2007). Thus for mutually exclusive proposals the finality criterion is accept or reject while for independent proposals the decision criterion is mainly based in ranking. The decision taken is based on the methods of ana lyzing the capital budgeting decisions. The environment of capital expenditure proposals are widely grouped into Expansion, Replacement, Diversification and Strategic proposals. Expansion proposals involve the capital expenditure to boost the production capacity within the same line of production (Shah, 2007).The investments are basically made in the familiar areas of activity as it involves minimal business risk as compared to diversification, however, larger risk than replacement expenditure. Replacement capital expenditure implies replacement of old machinery by a tender one or a modern one. This replacement only