Investments or capital expenditures form the frame-work for a company's future development and are a major determinant of efficiency and competitive power. Consequently, the wisdom of corporate investment decisions has a profound effect upon a company's future earnings and growth. From the standpoint of the stockholder, an effective capital expenditure program is apparently the only bulwark against the seemingly endless inflationary spiral. From the standpoint of labor, capital expenditures represent the basic source of future income which must exist before wage advances can be made.
Any business is continuously faced with the problem of making investment decisions. For the large integrated oil company, opportunities for investment exist in enterprises ranging from marketing to petrochemical, to exploration for and development of producing oil properties. Even for the very small business the problem of reinvestment of earnings, expansion, or diversification is a continuing one.
Foresighted judgment is an essential requisite for wise decisions about capital expenditures. However, for such judgment to be sound, it must be based on an analysis of all the facts, many of which may be extremely technical and complex. Management needs an objective means of measuring the economic worth of individual investment proposals in order to have a realistic basis for choosing among them and selecting those that will mean the most to the company's prosperity and growth. Probably a business organization will not have adequate investment capital at its disposal to make all the investments which have the potentiality of producing a profit; and even given unlimited capital, there is a maximum number of investment opportunities which can be efficiently handled with a given size organization. Therefore, it is apparent that either limited capital or the size of the organization may restrict the number of investments which can be made in a given period. Choosing among these investment opportunities, therefore, is of paramount importance.