Questions - What is the capital budgeting? Explain the importance of capital budgeting.

Answer – In this competitive arena pro-active organization makes attempts to convert challenges into opportunities. Indian economy is growing at 9%. It has for reaching implications. New lines of business such as retailing, investment advisory services and private banking are emerging. All these involve investment decisions. These investment decisions that corporate take to reap the benefits arising out of the emerging business opportunities are known as capital budgeting decisions.

Capital budgeting decisions involve evaluation of specific investment proposals. Here the word capital refers to the operating assets used in production of goods are rendering of services.

Budgeting involves formulating a plan of the expected cash flows during the future period. When we combine capital with budget we get capital budget.

Capital budget is a blue print of planned investments in operating assets. Therefore, capital budgeting is the process of evaluating the profitability of the projects under consideration and deciding on the proposal to be included in the capital budget for implementation.

Capital budgeting decisions involve investment of current funds in anticipation of cash flows occurring over a series of years in future. All these decisions are strategic because they change the profile of the organizations. Successfully originations have created wealth for their shareholders thought capital budgeting decisions.

Importance of capital budgeting:

Capital budgeting decisions are the most important decisions in corporate financial management. These decisions make or a business organization. These decisions commit a firm to invest its current funds in the operating assets with the hope of employing those most efficiently to generate a series of cash flows in future.

These decisions could be grouped into:

1. Replacement decisions: These decisions may be decision to replace the equipments for maintained of current level of business or decision aiming of cost reductions.

2. Decisions on expenditure for increasing the present operating level or expansion through improved network of distribution.

3. Decisions for products of new goods or rendering of new services.

4. Decisions on penetrating into new geographical area.

5. Decisions to comply with the regulatory structure effecting the operations of the company. Investment in assets to comply with the conditions imposed by environmental protection act comes under this category.

6. Decisions an investment to build township for providing residential accommodation to employees working in a manufacturing plant.