Skip to ContentGo to accessibility pageKeyboard shortcuts menu
OpenStax Logo
Principles of Finance

Why It Matters

Principles of FinanceWhy It Matters

Cars are put together on the assembly line at a Tesla factory.
Figure 16.1 Companies make decisions about investments every day. (credit: modification of “Tesla Factory, Fremont (CA, USA)” by Maurizio Pesce/flickr, CC BY 2.0)

One of the most important decisions a company faces is choosing which investments it should make. Should an automobile manufacturer purchase a new robot for its assembly line? Should an airline purchase a new plane to add to its fleet? Should a hotel chain build a new hotel in Atlanta? Should a bakery purchase tables and chairs to provide places for customers to eat? Should a pharmaceutical company spend money on research for a new vaccine? All of these questions involve spending money today to make money in the future.

The process of making these decisions is often referred to as capital budgeting. In order to grow and remain competitive, a firm relies on developing new products, improving existing products, and entering new markets. These new ventures require investments in fixed assets. The company must decide whether the project will generate enough cash to cover the costs of these initial expenditures once the project is up and running.

For example, Sam’s Sporting Goods sells sporting equipment and uniforms to players on local recreational and school teams. Customers have been inquiring about customizing items such as baseball caps and equipment bags with logos and other designs. Sam’s is considering purchasing an embroidery machine so that it can provide these customized items in-house. The machine will cost $16,000. Purchasing the embroidery machine would be an investment in a fixed asset. If it purchases the machine, Sam’s will be able to charge customers for customization.

The managers think that selling customized items will allow the company to increase its cash flow by $2,000 next year. They predict that as customers become more aware of this service, the ability to customize products in-house will increase the company’s cash flow by $4,000 the following year. The managers expect the machine will be used for five years, with the embroidery products increasing cash flows by $5,000 during each of the last three years the machine is used. Should Sam’s Sporting Goods invest in the embroidery machine? In this chapter, we consider the main capital budgeting techniques Sam’s and other companies can use to evaluate these types of decisions.

Order a print copy

As an Amazon Associate we earn from qualifying purchases.


This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution License and you must attribute OpenStax.

Attribution information
  • If you are redistributing all or part of this book in a print format, then you must include on every physical page the following attribution:
    Access for free at
  • If you are redistributing all or part of this book in a digital format, then you must include on every digital page view the following attribution:
    Access for free at
Citation information

© Jan 8, 2024 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.