Jan 3, 2013

Capital Budgeting - Significance of Capital Budgeting


WHAT IS CAPITAL BUDGET?
Capital budgeting decisions as the company's decision to invest this fund current activities may be better established in long-term forecasts of the expected stream of future benefits over a number of years.
Future benefits may take the form of lower costs, higher revenues, simplification of processes, improve quality, etc.
Decision capital budget includes the purchase and sale of assets, the replacement of old equipment with new, including leased equipment and the implementation of new projects. Make investments, capital management long-term investment decisions. Asset management, etc., is another name for the capital budgeting decision.

FEATURE OF CAPITAL BUDGETING DECISION:
a) Key Features of the decision of investment appraisal can be listed as follows
b) The funds will be invested in the current period in order to obtain future benefits.
c) receive future benefits are based on a series of the year and in one year.
d) There is often a relatively long period between the initial investment and get the first return.
e) A relatively high degree of risk involved in investment accounting, change that many factors in the future.
f) Cost of investments and the benefits of this investment should be measured in terms of cash flow and not in reference to the book profits.
g) The election of a worthwhile investment to the objectives of maximizing shareholder wealth by maximizing the value of the concept of justice.

SIGNIFICANCE OF CAPITAL BUDGET
Investment budget is very important for a business, and it is necessary to the investment plan for the following reasons:
Capital budgeting decision has long-term significance. The effect of the decision of the investment analysis will continue in the long term. Therefore, any wrong decision, the burden for a long time taken to be worn. The future prospects of a company depends largely on its own expenditure. The company can earn huge profits if they can make appropriate investments at appropriate times. Therefore, the company should have is sufficient reflection and consideration before making such decisions.
Investment decisions in general to large sums of money. These investments are back for a long time, but to get the goods, a company needs to invest huge sums of money. So, before you make such an investment, the company must take enough care and arrange for the collection of large funds.
Investment budget decision is irreversible in most cases. If a machine on the goods after purchase, it is difficult to recover the money from the sale, since the goods in question are very limited market. Thus, in many cases, the company has no choice but to give up, as the goods for sale at throw away price.
Investment requires big money. No company has unlimited money. If the money is not only wrong, loss of business is invested, it will also be deprived of profits would be derived from alternative uses of the money.
Investment appraisal is important because they are to make the difficult decision. To make such a decision must anticipate future events and the future revenues and expenditures. The future results can not always be expressed in monetary terms.
Based on a decision of budgeting, business investment in particular may increase the risk. Suppose that due to the adoption of a proposed investment, the company's turnover, but the fluctuation of income at the same time increased was also increased, in this case both the increased earnings and risk position the company. The cost structure of the company's future is also linked investment appraisal decisions.

4 comments:

  1. Really I like the points which you are given on the FEATURE OF CAPITAL BUDGETING DECISION.

    I thing Capital budgeting is a step by step process that businesses use to determine the merits of an investment project.

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