MEANING AND DEFINITIONS OF CAPITAL BUDGETING
CAPITAL BUDGETING revolves around capital expenditures which include large inflow and outflow of money to finance investment projects. It is a process by which a company decides whether it should invest in a project or not.
According to R.M, Lynch, "Capital budgeting consists in employment of available capital for the purpose of maximising the long term profitability (return on investment) of the firm"
According to Charles T. Horngern"Capital Budgeting is long-term planning for making and financing proposed capital outlays"
According to - Milton H. Spencer. Capital Budgeting involves the planning of expenditures for assets, the returns from which will be realized in future time period"
YOU CAN ALSO READ :- TECHNIQUES OF CAPITAL BUDGETING
FEATURES OF CAPITAL BUDGETING
- It involves the exchange of current funds for future benefit.
- The future benefits are expected to be realised over a series of years in future.
- Long Term Effect on Profitability
- Impacts Cost Structure
- Difficult Decisions
- It involves relatives a high degree of risk regarding the future benefits.
- A relatively long period between the initial outlay and the anticipated returns
IMPORTANCE OF CAPITAL BUDGETING
- Probability of Incurring Enormous Loss
- Evaluation of Available Investment Alternatives
- Selection of Right Investment
- Proper Utilization of Funds
- Complicacies of Investment Decisions
- Helps in Investment Decision
- Wealth Maximization
- Risk and Uncertainty
YOU CAN ALSO READ:- PYQ FINANCIAL MANAGEMENT
Objectives of Capital Budgeting
1. Establishing Priorities - investment priorities are established in capital budgeting
2. Cash Planning to ensure the availability of funds that will be sufficient to meet its cash requirements
3. Construction Planning to minimize the period expended for the construction or acquisition of a capital asset
4. Eliminating Duplication to minimize the duplication of efforts.
5. Revising Plans - changes in environmental factors may require revisions in authorization of investment.
PROCESS OF CAPITAL BUDGETING
- Assembling investments proposals
- Decision making
- Capital budget
- Implementation
- Performance review
ADVANTAGE OF CAPITAL BUDGETING
- Helps in understanding risks & its effects
- Decision making in investment opportunities
- Various techniques of capital budgeting
- Avoid over and Under Investment
- Maximize Shareholder's Wealth
- Control Project Expenditure
DISADVANTAGE OF CAPITAL BUDGETING
- Wrong decision affects long-term durability
- Uncertainty leads to wrong applicability
- Techniques are assumed & not real
- Higher Risk
- Uncertainty
- Ignores Non-Financial Aspects
YOU CAN ALSO READ :- TECHNIQUES OF CAPITAL BUDGETING
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