Page 99 - DBP5043

CAPITAL BUDGETING CONCEPT

WHAT IS CAPITAL BUDGETING

CAPITAL BUDGETING is one of the primary activities of a
company. Companies may expand or diversify to remain competitive
either by producing new product or entering a new business line
entirely, open a new branch, penetrate new market. So capital
budgeting is a process of selecting and evaluating longterm
investment, that is to make decision with respect to investments in
fixed asset.

It is crucial for company to make the right decision because these
projects require a huge amount of cash outflow committed for many
years. A right decision will increase the firm’s value as well as
shareholders’ wealth.

Independent projects

CAPITAL BUDGETING PROCESS

Involve the following:

Generating long-term investment proposals, which are consistent
with a firm’s long term objectives

Estimating the relevant after-tax incremental cash flow for these
project proposals

Evaluating these cash flows

Selecting the project that will maximize shareholders’ wealth

Re-evaluating these projects from time to time for control purposes
and carrying out post-audits for completed projects