Capital Budgeting
CAPITAL BUDGETING
MEANING OF CAPITAL BUDGETING
Capital budgeting is the making of long term planning decision for investment fixed assets and their financing. Capital budgeting decision is concerned with current investment that will pay for itself and yield an acceptable rate of return over its life span. Hampton (1992) defines capital budgeting as the decision making process by which firms evaluate the purchase of major fixed assets, including buildings, equipment. It also covers decisions to acquire other firms, either through purchase of their common stock or groups of assets that can be used to conduct an on-going business. It is a process used to evaluate capital expenditures. The primary objective in capital budgeting decision is to add to the value of a business by selecting investments that meet the goals of the organization and provide the highest possible rates of return.
The capital investment decision is one of the most significant decision areas. It might have effect on future profitability either because it might result in an increase in revenue or because it can cause an increase in efficiency and reduction in costs
FACTORS TO CONSIDER IN CAPITAL BUDGETING
The following factors may influence capital budgeting decisions.
i. Economic change: The economic condition is highly dynamic, it is never static. As such it is always important to try and foresee future economic developments. One development that must quickly be detected is the emergence that must be quickly detected is the emergence of new competitors and new markets.
ii Technological change: Nowadays change in the technological field is very rapid. Faster communication, increasing automation, new forms of materials and the endless products of more and more research and development makes it essential that any plan spanning the years predicts the broad development in r technology.
iii. Socio-political change: The societal values, norms and orientations do change even
MEANING OF CAPITAL BUDGETING
Capital budgeting is the making of long term planning decision for investment fixed assets and their financing. Capital budgeting decision is concerned with current investment that will pay for itself and yield an acceptable rate of return over its life span. Hampton (1992) defines capital budgeting as the decision making process by which firms evaluate the purchase of major fixed assets, including buildings, equipment. It also covers decisions to acquire other firms, either through purchase of their common stock or groups of assets that can be used to conduct an on-going business. It is a process used to evaluate capital expenditures. The primary objective in capital budgeting decision is to add to the value of a business by selecting investments that meet the goals of the organization and provide the highest possible rates of return.
The capital investment decision is one of the most significant decision areas. It might have effect on future profitability either because it might result in an increase in revenue or because it can cause an increase in efficiency and reduction in costs
FACTORS TO CONSIDER IN CAPITAL BUDGETING
The following factors may influence capital budgeting decisions.
i. Economic change: The economic condition is highly dynamic, it is never static. As such it is always important to try and foresee future economic developments. One development that must quickly be detected is the emergence that must be quickly detected is the emergence of new competitors and new markets.
ii Technological change: Nowadays change in the technological field is very rapid. Faster communication, increasing automation, new forms of materials and the endless products of more and more research and development makes it essential that any plan spanning the years predicts the broad development in r technology.
iii. Socio-political change: The societal values, norms and orientations do change even