the term capital refers to long-term assets used in production, while a budget is a plan which details projected inflows and outflows and outflows during some future period. so, the capital budget is a planned expenditure on long-terms assets, and capital budgeting is the process of evaluating and selecting long-terms investment. capital budgeting may be defined as the decision making process by which firms evaluate the purchase of major fixed assets, including building, machinery and equipment. capital budget describes the firm's formal panning process for the acquisition and investment of capital and results in a capital budget that is the firm's formal plan for the expenditure of money to purchase fixed assets.
example of projects include investment in property, plan and equipment research and development projects, larger advertising companions, or any other project that require a capital expenditure and generates a future cash flow. because capital expenditure can be very large and have a significant impact on the financial performance of the firm great importance is placed on project selection. this process is called capital budgeting. the goal of the firm is to maximize present shareholder value. this goal implies that project should be undertaken that result in a position net present value that is the present value of the expected cash inflow less the present value of the required capital expenditures.
categories of capital budgeting
capital budgeting decisions are assembled on various categories.
1. replacement decision: this category consists of expenditures to replace worn out or become outdated by new technology.
2. expansion decisions: this category consists of expansion of existing product line or expansion into new products.
3. diversification: this category consists of production of various products or to increase the area of business to reduce risk.
4. other categories: pollution control, equipment, safety requirements, social and environmental consideration.
example of projects include investment in property, plan and equipment research and development projects, larger advertising companions, or any other project that require a capital expenditure and generates a future cash flow. because capital expenditure can be very large and have a significant impact on the financial performance of the firm great importance is placed on project selection. this process is called capital budgeting. the goal of the firm is to maximize present shareholder value. this goal implies that project should be undertaken that result in a position net present value that is the present value of the expected cash inflow less the present value of the required capital expenditures.
categories of capital budgeting
capital budgeting decisions are assembled on various categories.
1. replacement decision: this category consists of expenditures to replace worn out or become outdated by new technology.
2. expansion decisions: this category consists of expansion of existing product line or expansion into new products.
3. diversification: this category consists of production of various products or to increase the area of business to reduce risk.
4. other categories: pollution control, equipment, safety requirements, social and environmental consideration.
No comments:
Post a Comment