Introduction to Capital Budgeting
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Definition of Capital Budgeting
Capital Budgeting is the process of evaluating and selecting long term investments. It involves an initial investment or cash outlay in expectation of future benefit. That is, it is having an initial expenditure and in future a revenue less running cost is expected. This normally extends more than one year.
Some examples for capital budgeting are:
Construction of new factories, Purchase of fixed assets like land, building, etc.
The decision of capital budgeting is complicated and important for a company. The decision should take in line with investors interests.
Importance of Capital Budgeting
Capital Budgeting decisions are important because of many reasons. Some of them are:
1. Long time period
2. Large Amount of Funds
3. Appropriate Time
4. Irreversibility
5. Involves Future Events