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Financial Management - Capital Budgeting – A Conceptual Framework

Capital Budgeting – Significance

   Posted On :  19.06.2018 10:55 pm

Capital budgeting involves capital rationing. This is the available funds that have to be allocated to competing projects in order of project potential.

Capital Budgeting – Significance

Capital budgeting involves capital rationing. This is the available funds that have to be allocated to competing projects in order of project potential. Normally the individuality of project poses the problem of capital rationing due to the fact that required funds and available funds may not be the same.

Capital budget becomes a control device when it is employed to control expenditure. Because manned outlays are limits to actual expenditure, the concern has to investigate the variation in order to keep expenditure under control.

A firm contemplating a major capital expenditure programme may need to arrange funds many years in advance to be sure of having the funds when required.

Capital budgeting provides useful tool with the help of which the management can reach prudent investment decision.

Capital budgeting is significant because it deals with right mind of evaluation of projects. A good project must not be rejected and a bad project must not be selected. Capital projects need to be thoroughly evaluated as to costs and benefits.

Capital projects involve investment in physical assets such as land, building plant, machinery etc. for manufacturing a product as against financial investments which involve investment in financial assets like shares, bonds or mutual funds. The benefits from the projects last for few to many years.

Capital projects involve huge outlay and last for years.

Capital budgeting thus involves the making of decisions to earmark funds for investment in long term assets yielding considerable benefits in future, based on a careful evaluation of the prospective profitability / utility of such proposed new investment.
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