Capital Budgeting

5568 Words Jul 10th, 2012 23 Pages
CAPITAL BUDGETING
MEANING OF CAPITAL BUDGETING
Capital budgeting is the making of long term planning decision for investment fixed assets and their financing. Capital budgeting decision is concerned with current investment that will pay for itself and yield an acceptable rate of return over its life span. Hampton (1992) defines capital budgeting as the decision making process by which firms evaluate the purchase of major fixed assets, including buildings, equipment. It also covers decisions to acquire other firms, either through purchase of their common stock or groups of assets that can be used to conduct an on-going business. It is a process used to evaluate capital expenditures. The primary objective in capital budgeting decision is
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Review such as a post audit might need to be carried out.

PLANNING AND CONTROL OF CAPITAL EXPENDITURE

Planning: The following are the steps involved on planning for capital expenditure. i. Determination of key investment factors: These factors are the demand, hence sales for product/services and the costs of production to give the cash flow, cash outflow etc. ii. Selection of an appropriate techniques of appraisal e.g. NPV, IRR etc iii. Source of finance iv. Evaluation of risk and uncertainty v. Consideration of specific problems such as liquidity, tax implications, and the effect of the proposed investment on the total investment strategy of the firm.
Control:
The instruments for controlling capital expenditure are i. Capital expenditure Committee: Some large organizations have a committee which is changed use the responsibility of initial screening of capital expenditure requests and recommend to the M.D. for approval. ii. Board of Directors: With the exception of provate companies, it is usual to limit the managing Directors authority to incur capital expenditure to a certain amount and any amount above this referred to the Board for approval. iii. Budgetary control: Capital expenditure budget should be

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