Capital Budgeting

Capital Budgeting is therefore, capital

expenditure decision concerning
acquisition, extension, expansion and
development of fixed assets. Capital
Budget in this way refers to acquisition and
development of fixed assets in operation.
Capital Budgeting may thus be
defined as the entire process of
generating , evaluating, selecting
and following up capital
expenditure alternatives.
 Issues/Features of Capital
Budgeting
• Capital Budgeting is concerned with long
term funds: Capital Budgeting involves
procurement of long term funds through issue of
shares & debentures, acceptance of public
deposits & loans from FI’s, banks etc. Long term
funds are used in the acquisition & development
of fixed assets.
• Involves heavy expenditure: The cost of
acquiring & developing fixed assets is very
heavy. It can’t be met by short term current
resources. It requires that funds should be
generated for long period.
Contd.
• Affecting cost structure: The heavy expenditures
incurred in the acquisition of fixed assets will definitely
affect the future cost structure of the business.
 Cost of acquiring funds
 Cost of production/ investment of enterprise.
• High time lag between investment & return: The
process of investment may continue for longer period,
just as acquisition & development of land, construction of
building & purchase of plant from abroad. The fruits of
these long term investments will be available, if these
assets are properly utilised. Capital budgeting is
therefore, an investment with patience.
Contd.
• Involves Considerable risk: Capital budgeting
is long term investment & as such it carries long
term uncertainties with it. Wise investment
decision pays rich dividend but any wrong
decision such as acquisition of obsolete, out of
date machines & equipments affects future
prospects adversely. In case, the assets
acquired remain unutilised, it is a complete
wastage. As such capital budgeting is a risky
investment.
• Determines the future course of action: Long
term investment are made with long term
objectives of the business.
Contd.
Investments are made directed towards
the cherished goal of the enterprise. The
trend of long term investment of the
company indicates its future course of
action.