Running Head: LITERATURE REVIEW 1
Literature Review Detailed Outline Assignment
LITERATURE REVIEW 2
1. Introduction
The literature review focuses on the ‘capital budgeting’ concept. Capital budgeting
involves the adoption of diverse evaluation techniques for the purpose of assessing potential
projects or investment options. In order to narrow the topic, the aim of the review is to explore
the impact of capital budgeting on strategic resource allocation in firms.
a. Main thesis – Capital budgeting plays an integral role in organizational settings to aid in the
strategic allocation of resources.
b. Supporting thesis – By effectively employing practices relating to cost accounting, business
entities across diverse industries can focus on evaluating potential investment options and
prioritizing projects on the basis of the projected or expected returns.
2. Capital Budgeting Techniques
There exists a diverse range of capital budgeting techniques that firms may employ
while evaluating a future investment option. Some of the most common techniques include the
Net Present Value (NPV) method, the Internal Rate of Return (IRR) method, the Payback
Period method, and the Profitability Index (PI) method (Purnamasari & Adriza, 2024).
a. Net Present Value method – It serves as a financial tool that helps in assessing the
profitability of an investment option by making a comparison between the present value (PV)
of expected cash inflow and the present value (PV) of cash outflow.
b. Internal Rate of Return method – This capital budgeting technique helps in the
computation and the comparison of the profitability of diverse projects or investments.
c. Payback Period method – The Payback Period method helps in assessing the cost-
effectiveness of an investment by taking into the initial investment and the annual cash flow.
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d. Profitability Index (PI) method – This capital budgeting techniques aids in determining
the attractiveness of a project. The calculation is done by dividing the present value of future
expected cash flows with the investment amount borne initially.
3. Role of capital budgeting in the strategic allocation of resources
Capital budgeting is a pivotal process within organizations since it helps to make
important finance-related decisions. By adopting appropriate capital budgeting practices and
techniques firms across diverse industries can decide how they intend to use the available
capital (Siziba & Hall, 2021).
a. Strategic Alignment – Capital budgeting can play a strategic role and help business entities
match their investment decisions with their organizational goals and objectives
b. Aid in Decision-Making – Capital budgeting involves the thorough assessment of risks that
may be involved in potential projects. On the basis of the detailed evaluation, firms are in a
position to make well-informed decisions regarding which project to choose.
c. Long-term business planning - Capital budgeting tools and techniques can help
organizations in making long-term planning. Such practices can influence the strategic
approach that is adopted by entities while operating in their respective industries.
d. Financial Performance – In organizational contexts capital budgeting plays a strategic role.
This is because it helps in determining the financial viability of projects. Thus firms have the
opportunity to optimally use their resources and improve their financial performance.
4. Application of capital budgeting practices in small and medium-sized enterprises
Firms of diverse sizes employ capital budgeting practices to make important finance-
related decisions. In the context of small and medium-sized enterprises, the significance of
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appropriate capital budgeting practices is immense. It can guide the management of SMEs to
optimally employ their capital to achieve their goals and objectives.
a. Common capital budgeting techniques adopted by SMEs – Some of the common capital
budgeting techniques that are adopted by SMEs include the Net Present Value (NPV) method,
and the Payback Period method.
b. Challenges faced by SMEs while applying capital budgeting practices - In small and
medium-sized enterprises, specific challenges or concerns may arise such as over-investing or
under-investing which may ultimately lead to agency costs (Mota & Moreira, 2023). Some of
the other challenges that may arise in their path include the availability of limited resources,
time constraints and the lack of a well-defined structure as they may be impacted by subjective
variables (Al Wahaibi et al., 2024).
5. Conclusion
The literature review highlights the important role that capital budgeting plays in
organizations to facilitate the optimum utilization of resources.
a. Strategic importance of capital budgeting – The capital budgeting process is of high
strategic importance for organizations.
b. Competitive advantage – The effective adoption of capital budgeting practices can act as a
source of competitive advantage for organizations.
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References
Al Wahaibi, M. A. K., Hussainy, S. S., Rajan, R., & Younas, A. (2024). SMEs Capital
Budgeting Practices: A Review Article. Journal of Ecohumanism, 3(7), 2426-2430. DOI:
https://doi.org/10.62754/joe.v3i7.4390
Mota, J., & Moreira, A. C. (2023). Capital Budgeting Practices: A Survey of Two
Industries. Journal of Risk and Financial Management, 16(3), 191.
https://doi.org/10.3390/jrfm16030191
Purnamasari, P., & Adriza. (2024). Capital budgeting techniques and financial performance: a
comparison between SMEs and large listed firms. Cogent Economics & Finance, 12(1),
2404707. DOI:10.1080/23322039.2024.2404707
Siziba, S., & Hall, J. H. (2021). The evolution of the application of capital budgeting techniques
in enterprises. Global finance journal, 47, 100504.
https://doi.org/10.1016/j.gfj.2019.100504
