Capital budgeting technique are used in financial management for planning long-term funds. Since these funds are high in volume they have long term implications. They also affect the profitability of the company.Capital budgeting decision is for the purchase of assets like land, building , plant and machinery and development programmes of a product.Such decisions are also taken at the time of diversification or expansions of product line or introduction of new products.Research and development and promotional expenses from part of long-term decisions making process.
Capital budgeting is a process, which is a continuous activity in an organisation. Work within the form is dynamic in nature and may require expansions, diversification and replacement of assets.Capital budgeting can be defined as an important decisions to invest in long term assets with the view to get the benefit of cash inflow over many years. The long term assets are usually those assets, which wood effect of form operation that extend beyond the one year. The focus of capital budgeting decision is an acquisition, modernization, expansion and replacement of assets.These decisions have a direct impact on the value of the form and in maximizing the wealth of the shareholders. If the investments are profitable it will add value of the firm. If cash inflows are higher than the opportunity cost of capital it will provide an increase to the wealth of the shareholder.
The financial manager is expected to analyse each proposal and after evaluating alternative proposal he should select that proposal which contributes to enhancing the wealth of shareholders over a long-term period of time.
Prof. Dr. Rashmi Gujrati,
Professor Principal (KCSMCA)
Regulatory Board member of In Traders Academic Platform
Member ICA, IAA, AICP, FSSER, AASE, IBIMA