Concept of Capital Budgeting

Capital Budgeting:

Capital budgeting is the process of generating, evaluating, selecting and following-up on capital expenditure projects. The term Capital budgeting is used interchangeably with capital expenditure decision, capital expenditure management & long-term investment decision.

The methods employed to evaluate the worth of capital expenditure proposals are known as capital budgeting techniques .The popular methods are-

(a)    Average rate of return

(b)   Pay back period

(c)    Net present value

(d)   Internal rate of return

(e)    Profitability index

The following are the basic features of capital budgeting-

• Potentially large anticipated benefits
• A relatively high degree of risk
• A relatively long time period between the initial outlay & the anticipated return