write a essay on capital budgeting minimum 500 words
Answers
Capital budgeting is a way to evaluate and compare significant potential investments and expenses in order to decide which ones are most important.
- In capital budgeting each project is measured by its potential future profit, so the management of the organization can choose the one to invest first.
- Capital budgeting requires decisions on a company's long-term investment in operations. Examples of capital budgeting are the preparation of future returns on equipment, real estate and technological investments.
- In capital budgeting, first the potential opportunities are identified and evaluated, next the operating and implementation costs are estimated, along with this the cash flow of the company is also estimated. Finally the risk is assessed and then the project is implemented.
- Capital budgeting is calculated through methods such as payback perios, the IRR, the method of accounting rate of return, NPV method and many more.
★Capital budgeting refers to the process a firm uses to make decisions concerning investments in the long-term assets of the firm. The general idea is that the capital, or long-term funds raised by the firms are used to invest in assets that will enable the firm to generate revenues several years into the future.
→Some of the definitions of capital budgeting are:
★Capital budgeting is the process by which the financial manager decides whether to invest in specific capital projects or assets.
★Capital budgeting (or investment appraisal) is the planning process used to determine whether a firm’s long-term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing.
★Capital budgeting is a method of evaluating investment proposals to determine whether they are financially sound, and to allocate limited capital resources to the most attractive proposals.
★The term ‘capital budgeting’ is used interchangeably with capital expenditure decisions, capital expenditure managements, long-term investment decision, management of fixed assets and so on.
★The budget provides a guidance as to the amount of capital that may be needed for procurement of capital assets during the budget period. The budget is prepared after taking into account the available productive capacities, probable reallocation of existing assets and possible improvement in production techniques. If necessary, separate budgets may be prepared for each item of assets, such as a building budget, a plant and equipment budget, etc.
★The capital budgeting decision, therefore, involves a current outlay or series of outlays of cash resources in return for an anticipated flow of future benefits. In other words, the system of capital budgeting is employed to evaluate expenditure decisions which involve current outlays but are likely to produce benefits over a period of time longer than one year.
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