Published On:Friday, 23 December 2011
Posted by Muhammad Atif Saeed
What is Capital Budgeting?
What is Capital Budgeting?
Capital budgeting is defined as the process of planning for projects on assets with cash flows of a period greater than one year.
These projects can be classified as:
· Replacement decisions to maintain the business
· Existing product or market expansion
· New products and services
· Regulatory, safety and environmental
· Other, including pet projects or difficult to evaluate projects
Additionally, projects can also be classified as mutually exclusive or independent:- Mutually exclusive projects are potential projects that are unrelated, and any combination of those projects can be accepted.
- Independent projects indicate there is only one project among all possible projects that can be accepted.
The Importance of Capital BudgetingCapital budgeting is important for many reasons:
- Since projects approved via capital budgeting are long term, the firm becomes tied to the project and loses some of its flexibility during that period.
- When making the decision to purchase an asset, managers need to forecast the revenue over the life of that asset.
- Lastly, given the length of the projects, capital-budgeting decisions ultimately define the strategic plan of the company.
These projects can be classified as:
· Replacement decisions to maintain the business
· Existing product or market expansion
· New products and services
· Regulatory, safety and environmental
· Other, including pet projects or difficult to evaluate projects
Additionally, projects can also be classified as mutually exclusive or independent:- Mutually exclusive projects are potential projects that are unrelated, and any combination of those projects can be accepted.
- Independent projects indicate there is only one project among all possible projects that can be accepted.
The Importance of Capital BudgetingCapital budgeting is important for many reasons:
- Since projects approved via capital budgeting are long term, the firm becomes tied to the project and loses some of its flexibility during that period.
- When making the decision to purchase an asset, managers need to forecast the revenue over the life of that asset.
- Lastly, given the length of the projects, capital-budgeting decisions ultimately define the strategic plan of the company.
