Concept of capital Budgeting
Capital budgeting normally refers to long-term planning for proposed capital outlays and their financing. It is the decision-making process by which firms evaluate the acquisition of major fixed assets whose benefits would be spread over several time periods. Succinctly, it involves current investment in which the benefits are expected to be received beyond one year in the future. The use of one year as a line of demarcation is, however, somewhat arbitrary. The main exercise in capital budgeting is to judge whether or not an investment proposals provides a reasonable return to investors which would be consistent with the investment objective of the business. Hence, capital budgeting involves generation of investment proposals, estimating costs and benefits (cash flows) for the investment proposals and evaluation of net benefits and selection of projects based upon an acceptance criterion.
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