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CAPITAL BUDGETING

The term Capital Budgeting refers to the long-term planning for proposed capital outlays or expenditure for the purpose of maximizing return on investments. The capital expenditure may be :
(1) Cost of mechanization, automation and replacement.
(2) Cost of acquisition of fixed assets. e.g., land, building and machinery etc.
(3) Investment on research and development.
(4) Cost of development and expansion of existing and new projects.
DEFINITION OF CAPITAL BUDGETING
Capital budgeting is the decision making process by which a firm evaluates the purchase of major
fixed assets including building, machinery and equipment.
From the above definitions, it may be concluded that capital budgeting relates to the evaluation of
several alternative capital projects for the purpose of assessing those which have the highest rate of
return on investment.
Importance of Capital Budgeting :
Capital budgeting is important because of the following reasons :
(1) Capital budgeting decisions involve long-term implication for the firm, and influence its risk
complexion.
(2) Capital budgeting involves commitment of large amount of funds.
(3) Capital decisions are required to assessment of future events which are uncertain.
(4) Wrong sale forecast ; may lead to over or under investment of resources.
(5) In most cases, capital budgeting decisions are irreversible. This is because it is very difficult to find
a market for the capital goods. The only alternative available is to scrap the asset, and incur heavy
loss.
(6) Capital budgeting ensures the selection of right source of finance at the right time.

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24-11-2021    0