Page 119 - DMGT409Basic Financial Management

Basic Financial Management Mahesh Kumar Sarva, Lovely Professional University

Notes Unit 7: Capital Budgeting

CONTENTS

Objectives
Introduction

7.1 Meaning and Definition of Capital Budgeting
7.2 Capital Budgeting Process
7.3 Methods of Capital Budgeting

7.3.1 Traditional Techniques or Non-discounted Cash Flow Techniques
7.3.2 Modern Techniques or Discounted Cash Flow (DCF) Techniques
7.4 Summary
7.5 Keywords

7.6 Self Assessment
7.7 Review Questions
7.8 Further Readings

Objectives

After studying this unit, you will be able to:

Define meaning and definition of capital budgeting
Describe process of capital budgeting
Explain methods of capital budgeting

Introduction

Capital project planning is the process by which companies allocate funds to various investment

projects designed to ensure profitability and growth.
Evaluation of such projects involves estimating their future benefits to the company and

comparing these with their costs.
In a competitive economy, the economic viability and prosperity of a company depends upon the
effectiveness and adequacy of capital expenditure evaluation and fixed assets management.

7.1 Meaning and Definition of Capital Budgeting
Capital budgeting refers to planning the deployment of available capital for the purpose of

maximizing the long-term profitability of the firm. It is the firm’s decision to invest its current

funds most efficiently in long-term activities in anticipation of flow of future benefits over a series

of years.

In other words, Capital budget may be defined as the firm’s decision to invest its current funds

most efficiently in the long-term assets in anticipation of an expected flow of benefits over a series
of years. Therefore, it involves a current outlay or series of outlay of cash resources in return for
an anticipated flow of future benefi ts.

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