ASSIGNMENT #2

Navarro, Rachel M.
II-D HRDM

1. Discuss Capital Budgeting in your own words.

Capital budgeting is the process a business undertakes to evaluate potential major

projects or investments. It is the process that a business uses to determine which
proposed fixed assets purchases it should accept, and which should be declined.
Capital budgeting is used to create a quantitative view of each proposed fixed asset
investment, thereby giving a rational basis for making a judgment. It is used by
companies to evaluate major projects and investments, such as new plants or
equipment. It is the process which involves analyzing a project’s cash inflows and
outflows to determine whether the expected return meets a set benchmark.

2. What is the importance of capital budgeting in an organization?

Capital Budgeting is important in an organization because it creates the measurability

and accountability of the project by using various techniques like calculation of net
present value, considering the internal rate of return, payback period, profitability index,
and accounting rate of return.

The capital Budgeting process generally helps the company in taking decisions like
Investment decisions and financing decisions. Every company should have the proper
capital budgeting processes taken place well in advance before initiating any large
investment capital project. Capital budgeting processes helps to evaluate the growth and
profitability of the projects. This can also help to compare the profitability of different
projects to be carried out by the company and in prioritization of one project over the
other. Also, the company will come under safe conditions in terms of the regulatory
requirements which results in the boost up of the various shareholders’ investment in the
company.