Capital Budgeting is a process of making investment decisions in capital expenditures. It is an expenditure the benefits of which are likely to be received over a period of time exceeding one year. Capital Budgeting decisions are very important to every organization. Any fallacious investment decision may prove to be lethal for the survival of the business concern.
It is also known as the expenditure incurred for acquiring or improving the fixed assets, the benefits of which are expected to be received over a number of years in future. The basic aim of capital budgeting is to allocate the available funds to a variety of proposals. The essential factor that regulates the capital budgeting decisions is the success of the approaching investment.
Capital budgeting means, “The process of preparing a plan for the raising of capital funds and for their deployment. For an incorporated business, funds may be obtained from a wide variety of sources. Chiefs amongst these are issues of ordinary shares or preference shares and of loan capital.”
For making up accurate capital budgeting decisions the awareness of its methods is very important. A number of methods like rate of return method, pay back period method, net present value method, internal rate of return method and profitability index method can be used for preparing capital budgeting decisions.
The success of the business enterprise largely depends on the capital budgeting decisions taken by the management. The Capital budgeting decisions are long-term oriented and irreversible in nature. Such decisions are considered to be of chief significance in heavy investment, long-term commitment of funds and impact on profitability.
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