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California Management Review
California Management Review is a premier academic management journal published at UC Berkeley
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Article Information
How to Evaluate Investment Proposals
Friedland, Seymour
2
/
2
(
Winter
1960
):
47
-
56
The article presents a practical demonstration of how capital budgeting can be used to make better decisions on new investments and re-equipment policy. In addition, examples of the arithmetic involved in the evaluation of new investments and in the solution of re-equipment problems are also shown in the article. The aim of the capital budget is to ascertain that the rate of return on each investment project undertaken is not less than the cost of funds needed to finance the project. Conversely, the cost of any source of funds should not be more than the rate of return on the investment financed by that source of funds. The general procedure for capital budgeting is as follows on the basis of forecasts, calculate the rate of return for all proposed investment projects and for all existing investment projects, place these projects new and old, in order of diminishing rate of return, again on the basis of forecasts, estimate the cost of capital for each available source of funds. These sources include external sources, internally generated sources and the liquidation of existing investments. Included also would be existing sources of funds. These sources would be refinanced if the cost of capital for the existing sources exceeds the rate of return generated by the projects in which these funds are invested.
