Capital Budgeting Unit :II Financial Management

CAPITAL BUDGETING Capital budgeting is the process of making investment decisions regarding capital expenditures. Any expenditure incurred which tends to improve existing fixed assets so as to increase the profitability or reducing the cost of production may be called as capital expenditure. Financial Management

Definition According to Lynch, ”Capital budgeting consists in planning,development of available capital for the purpose of maximizing the long term profitability of the concern”. Financial Management

Importance of capital budgeting Heavy Investment Permanent commitment of funds Long term effect on profitability Irreversible in nature Wrong sales forecast may lead to over or under investment of resources. Financial Management

Types of Capital expenditure It is of two types: Capital expenditure that increases the revenue Capital expenditure that reduces the cost Financial Management