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Financial Management - Capital Budgeting – A Conceptual Framework

Meaning and Definition - Capital Budgeting

   Posted On :  19.06.2018 10:47 pm

Capital budgeting decisions are of paramount importance in financial decisions, because efficient allocation of capital resources is one of the most crucial decisions of financial management.

Capital Budgeting – Meaning


Capital budgeting decisions are of paramount importance in financial decisions, because efficient allocation of capital resources is one of the most crucial decisions of financial management. Capital budgeting 
is budgeting for capital projects. It is significant because it deals with right kind of evaluation of projects. The exercise involves ascertaining estimating cash inflows and outflows, matching the cash inflows with the outflows appropriately and evaluation of desirability of the project. It is a managerial technique of meeting capital expenditure with the overall objectives of the firm. Capital budgeting means planning for capital assets. It is a complex process as it involves decisions relating to the investment of current funds for the benefit to be achieved in future. The overall objective of capital budgeting is to maximize the profitability of the firm / the return on investment.

Capital Budgeting – Definition

 
“Capital budgeting” has been formally defined as follows.

1. “Capital budgeting is long-term planning for making and financing proposed capital outlay”.

-Charles T. Horngreen

2. “The capital budgeting generally refers to acquiring inputs with long-term returns”.

-Richards & Greenlaw
 
3. “Capital budgeting involves the planning of expenditure for assets, the returns from which will be realized in future time periods”.

-Milton H. Spencer

The long-term activities are those activities that influence firms operation beyond the one year period. The basic features of capital budgeting decisions are:

1. There is an investment in long term activities

2. Current funds are exchanged for future benefits

3. The future benefits will be available to the firm over series of years. 
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