Capital Budgeting
Capital budgeting is the process of evaluating and selecting long-term investments opportunities that are parallel with the firm's objectives. And to fulfill these objectives different investment opportunities are evaluated and then finally one is selected. And, firm generally made capital expenditure in earning assets that could increase their earning capacity.
Following are the key motives for capital expenditures:
1. Expansion The most common motive is the expansion of firm's operations. And in this firms generally acquire fixed assets because only fixed assets can increase the earning capacity.
2. Replacements When the machinery of the firm outdates then replacements decisions are made. Replacements are also made when the firm reaches maturity and its growth slows.
3. Renewal This is the alternative of replacements. This involves rebuilding, overhauling or retrofitting an existing fixed asset. Basis difference is that in replacement we replace the whole asset but in renewal we only replace the a part of asset.
4. Other If firm make expenditure other that above mentioned that it will fall in this category.
Steps in Capital Budgeting
Different authors present different approaches in capital budgeting process. But the basic logic is same:
1. Screening and Selection of Investments Among different investment opportunities we generally evaluate and select the investment opportunity by using Capital Budgeting techniques (DCF and Non DCF).
2. Capital Budget Proposal A budget is proposed in which it is discussed that what will our key expenditure? What will be the total cost of investment? When cash flows will occur?
3. Budget Approval and Authorization The proposed budget is presented to the top management for approval and top management make authorization and gives the directions that from when these funds will be generated, some time internally and some time externally.
4. Implementation Following the approval and authorization the expenditures are made and project is implemented.
5. Evaluation and control Once the project is implemented the results are monitored and matched with the objectives of the firm.
Capital budgeting is the process of evaluating and selecting long-term investments opportunities that are parallel with the firm's objectives. And to fulfill these objectives different investment opportunities are evaluated and then finally one is selected. And, firm generally made capital expenditure in earning assets that could increase their earning capacity.
Following are the key motives for capital expenditures:
1. Expansion The most common motive is the expansion of firm's operations. And in this firms generally acquire fixed assets because only fixed assets can increase the earning capacity.
2. Replacements When the machinery of the firm outdates then replacements decisions are made. Replacements are also made when the firm reaches maturity and its growth slows.
3. Renewal This is the alternative of replacements. This involves rebuilding, overhauling or retrofitting an existing fixed asset. Basis difference is that in replacement we replace the whole asset but in renewal we only replace the a part of asset.
4. Other If firm make expenditure other that above mentioned that it will fall in this category.
Steps in Capital Budgeting
Different authors present different approaches in capital budgeting process. But the basic logic is same:
1. Screening and Selection of Investments Among different investment opportunities we generally evaluate and select the investment opportunity by using Capital Budgeting techniques (DCF and Non DCF).
2. Capital Budget Proposal A budget is proposed in which it is discussed that what will our key expenditure? What will be the total cost of investment? When cash flows will occur?
3. Budget Approval and Authorization The proposed budget is presented to the top management for approval and top management make authorization and gives the directions that from when these funds will be generated, some time internally and some time externally.
4. Implementation Following the approval and authorization the expenditures are made and project is implemented.
5. Evaluation and control Once the project is implemented the results are monitored and matched with the objectives of the firm.
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