1. CAPITAL BUDGETING
INTRODUCTION:
Capital Budgeting is the art of finding assets that are worth more than they cost
to achieve a predetermined goal i.e., ‘optimizing the wealth of a business
enterprise’. Capital investment involves a cash outflow in the immediate future in
anticipation of returns at a future date. A capital investment decision involves a
largely irreversible commitment of resources that is generally subject to
significant degree of risk. Such decisions have for reading efforts on an
enterprise’s profitability and flexibility over the long-term. Acceptance of non-
viable proposals acts as a drag on the resources of an enterprise and may
eventually lead to bankruptcy. For making a rational decision regarding the capital
investment proposals, the decision maker needs some techniques to convert the
cash outflows and cash inflows of a project into meaningful yardsticks which can
measure the economic worthiness of projects.
CAPITAL BUDGETING = Investing in Long-term Assets
Definition:
a. Capital: Fixed assets used in production
b. Budget: Plan of in- and outflows during some period
c. Capital Budget: A list of planned investment (i.e., expenditures on fixed
assets) outlays for different projects.
d. Capital Budgeting: Process of selecting viable investment projects In this
course, investments (long term) are needed in order to:
Expand in existing markets.
Enter new markets.
Replace existing capital assets