Capital budgeting means making investment decisions in capital expenditure. Capital expenditure means making expenditure at present but the benefit of which is going to be received over a period of time. For example when we buy the fixed assets like land and building, we spent the expenditure once but its benefit is going to be received in the coming future. Capital budgeting is also known as investment decision making, capital expenditure decision, planning and analysis of capital expenditure and long term investment decision.
- Capital budgeting involves huge funds.
- Capital budgeting involves investment in long term activities.
- Capital budgeting affects the profitability of the firm.
- Capital budgeting uses current funds for future benefits.
Importance of capital budgeting:
Capital budgeting involves huge funds which are far more than the resources of the firm. That’s why it is very important for the firm to plan and control its capital expenditure.
- Capital budgeting involves investment in long term activities so one wrong decision can effect the future destiny of the firm.
- Capital budgeting decisions are irreversible as it is very difficult to take back these decisions.
- Capital budgeting decisions are of national importance as the investment decisions taken by the firm affect the employment, economic growth and economic activities.
- Capital budgeting decisions are difficult to make as these are based upon future which is uncertain.