Capital budgeting is a business's official technique applied for calculating possible outflows or investments that are significant in quantity. It entails the decision to invest existing funds for additional purposes, upgrading or maintenance of fixed assets. According to Batra and Verma (2014), the capital budgeting process is utilized for enhancing future organizational profits since most firms are in a position to manage the minimal quantity of the most significant projects at any one time. The capital budgeting process has the most considerable risks, but vast amounts of profit can be approximated.
The capital budgeting process is utilized by the firm to evaluate primary projects and investments. The procedure comprises analyzing a project's cash inflows and outflows. It is also used to assess if return achieves a required benchmark. It is an essential process in an organization because it creates measurability and accountability. Businesses tend to use in determining long term financial planning and economic profitability of any projects (Malenko, 2019). Many companies referred to it as an investment appraisal because it evaluates the costs and benefits of potential large-scale projects. Companies utilized many techniques such as accounting rates, payback period, internal rate of return, net present value, and profitability index.
Delegate your assignment to our experts and they will do the rest.
Types of projects subject to the capital budgeting process include new products and new markets, growth of present products or markets, and replacement projects to decrease business expenses. New products or new markets need growth and expansion. Companies use capital budgeting for research and development. The expansion of existing products or markets means expanding business activities. The companies use capital budgeting techniques to acknowledge a surge in the growth of demand.
The capital budgeting process is essential in the allocation of resources because it creates measurability and accountability. If companies need to invest their funds in a project without knowing risks and returns, they would be irresponsible and held accountable by business shareholders or owners. The company also uses the tool to measure the effectiveness of the project.
References
Batra, R., & Verma, S. (2014). An empirical insight into different stages of capital budgeting. Global Business Review , 15 (2), 339-362. https://journals.sagepub.com/doi/abs/10.1177/0972150914523588
Malenko, A. (2019). Optimal dynamic capital budgeting. The Review of Economic Studies , 86 (4), 1747-1778. https://academic.oup.com/restud/article-abstract/86/4/1747/5076441
