Accounts

Topics: Net present value / Pages: 25 (6002 words) / Published: Dec 7th, 2012
m.Module 3
CAPITAL BUDGETING

Meaning of Capital Budgeting :-
Capital Budgeting is the process of making Decisions regarding long term investments in Fixed Assets which are not meant for sale. It is long range planning to employ the available capital for the purpose of maximizing the long term profitability of the concern.

Definition of Capital Budgeting:-
Prof I.M.PANDEY Defines Capital Budgeting as the firms decision to invest its current funds most efficiently in long term activities in anticipation of an expected flow of future benefits over a series of years.

Charles T Horngren Defines Capital Budgeting is long term planning for making and financing proposed capital outlays.

Features of Capital Budgeting:-
1. The exchange of current funds for future benefits
2. Funds are invested in long term assets
3. High Risk

Importance of Capital Budgeting:-

1. Long term Effects: - Capital Budgeting decisions determine the future destiny of the firm. An appropriate decision can yield amazing returns; where as a wrong decision can endanger the survival of the firm.

2. Associated with Risk; - Long term investment of funds is exposed to different types of risks. The longer is the period of the project, the greater may be the risk and uncertainty.

3. Large size of funds: - Capital Budgeting Decisions require large amount of funds for acquisition of fixed assets.

4. Irreversible Decisions:-Capital Budgeting Decision is irreversible and the amount invested cannot be realized back.

5. Wealth Maximization of Shareholders: - The basic objective of financial management is to maximize the wealth of the shareholders therefore the objective of capital budgeting is to select those long term investment projects which are expected to make maximum contribution to the wealth of shareholders in the long run.

Objectives of Capital Budgeting: -

1. Evaluation of Proposed Capital Expenditures: - Evaluation of capital expenditure to be incurred on

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