2. Capital budgeting is a required managerial tool. One duty of a financial
manager is to choose investments with satisfactory cash flows and rates
of return.Therefore, a financial manager must be able to decide whether
an investment is worth undertaking and be able to choose intelligently
between two or more alternatives.To do this, a sound procedure to
evaluate, compare, and select projects is needed.This procedure is called
capital budgeting.
“Capital Budgeting” by Huzaifah Irshaad 2
3. Meaning of Capital Budgeting :
The term Capital Budgeting refers to the long-term planning for
proposed capital outlays or expenditure for the purpose of
maximizing return on investments. The capital expenditure
may be :
• Cost of mechanization, automation and replacement.
• Cost of acquisition of fixed assets. e.g., land, building and
machinery etc.
• Investment on research and development.
• Cost of development and expansion of existing and new
Projects.
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4. The following are the important objectives of capital
budgeting:
To ensure the selection of the possible profitable capital projects.
To ensure the effective Control of capital expenditure in order to
achieve by forecasting the long-term financial requirements.
Determining the required quantum takes place as per
authorization and sanctions.
To facilitate co-ordination of inter-departmental project funds
among the competing capital Projects.
To ensure maximization of profit by allocating the available
investible.
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