Objective of capital Budgeting
Selection of the right mix of profitable projects.
It may be said that the overall objectives of capital budgeting is to allocate the available investible funds among the competing capital projects in order to maximize the total profitability. This is made possible by employing the various evaluation techniques for the selection of investment projects which contribute the maximum towards the overall investment objective. In the case of public enterprises, capital budgeting may also assure fulfillment of other objective such as promotion of employment, development of backward regions, etc.
Capital Expenditure control.
Control of capital expenditure is the next important objective of capital budgeting. This is achieved by forecasting the long-term financial requirements and thereby enabling the management to plan in advance to raise funds at the right time. The objective of preparing capital budget is to plan and then compare the actual capital expenditure with the budgeted figure for controlling costs.
Determining the required quantum and the right source of funds for investment.
The next important objective of capital budgeting is to determine the funds required for long-term project and to see that such estimates fall in line with the company’s financial policies. It also aims to compromise between the availability of funds and needs of the capital projects.