Definition:
“ Capital budgeting is long term planning for making and financing proposed capital outlays.” Capital : Fixed assets used in production Budget : Plan of in- and outflows during some period Capital Budget : A list of planned investment (i.e., expenditures on fixed assets) outlays for different projects. Capital Budgeting : Process of selecting viable investment projects Definition
Positioning of capital budgeting:
Positioning of capital budgeting
Projects:
Independent : A project that has nothing to do with other projects under investigation. Example: Replace copy machine and build a new plant. Mutually Exclusive : You only need one of these alternative projects. Example: Buy IBM or Apple PC Projects
The eight steps in capital budgeting:
T he eight steps in capital budgeting
Capital expenditure budget:
Capital expenditure budget “ Planned allocations for acquiring capital assets.” The amount of money needed to spend on capital items or fixed assets such as land, buildings, roads, equipment, etc. that are projected to generate income in the future. Capital Expenditure Budget is plan prepared for individual capital expenditure projects.
Types of capital expenditure:
Types of capital expenditure Capital expenditure which increases revenue It fetches additional income in future Eg: Production of new products Capital expenditure which reduces costs Helps in reducing cost of present production Eg: Purchase of improved machineries
Importance of capital budgeting:
Huge amount of investment Permanent and irreversible commitment of funds Long-term impact on profitability Growth and expansion Cost over runs (excessive costs if not done properly) Alternatives Multiplicity of variables Top management activity Importance of capital budgeting
PowerPoint Presentation:
By nandini MBA