Chapter 29 Capital Budgeting
CHAPTER 29
Capital Budgeting
Meaning
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 Budget is also known as "Investment Decision Making or Capital Expenditure Decisions" or
"Planning Capital Expenditure" etc. Normally such decisions where investment of money and expected benefits arising therefrom are spread over more than one year, it includes both raising of long-term funds as well as their utilization. Charles T. Horngnen has defined capital budgeting as "Capital Budgeting is longterm planning for making and financing proposed capital outlays."
In other words, capital budgeting is the decision making process by which a firm evaluates the purchase of major fixed assets including building, machinery and equipment. According to Hamption, John. 1.,
"Capital budgeting is concerned with the firm's formal process for the acquisition and investment of capital."
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.
Capital Budgeting
643
(3)
Capital decisions are required to assessment of future events which are uncertain.
(4)
Wrong sale forcast ; may lead to over or under investment of
Capital Budgeting
Meaning
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 Budget is also known as "Investment Decision Making or Capital Expenditure Decisions" or
"Planning Capital Expenditure" etc. Normally such decisions where investment of money and expected benefits arising therefrom are spread over more than one year, it includes both raising of long-term funds as well as their utilization. Charles T. Horngnen has defined capital budgeting as "Capital Budgeting is longterm planning for making and financing proposed capital outlays."
In other words, capital budgeting is the decision making process by which a firm evaluates the purchase of major fixed assets including building, machinery and equipment. According to Hamption, John. 1.,
"Capital budgeting is concerned with the firm's formal process for the acquisition and investment of capital."
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.
Capital Budgeting
643
(3)
Capital decisions are required to assessment of future events which are uncertain.
(4)
Wrong sale forcast ; may lead to over or under investment of