MEANING ,PROCESS AND SIGNIFICANCE OF CAPITAL BUDGETING

• CAPITAL BUDGETING
  MEANING,COMPONENTS
  PROCESS AND SIGNIFICANCE
• FINANCIAL MANAGEMENT
  
  MEANING OF CAPITAL BUDGETING

1. CAPITAL BUDGETING MEANS PLANNING FOR CAPITAL ASSET
2. INVESTMENT DECISIONS ARE RELATED TO LONG TERM ASSETS ARE CALLED CAPITAL BUDGETING
3. CAPITAL BUDGETING I THE PROCESS OF MAKING INVESTMENT DECISIONS IN CAPITAL EXPENDITUR
4. A CAPITAL EXPENDITURE MAY BE DEFINED AS AN EXPENDITURE THE BENEFITS OF WHICH ARE EXPECTED TO RECEIVED OVER  PERIOD OF TIME EXCEEDING ONE YEAR
5. EXPENDITURE IS INCURRED AT ONE POINT OF TIME WHERE AS THE BENEFITS OF THE EXPENDITURE ARE REALIZED IN DIFFERENT POINT OF TIME
6. CAPITAL EXPENDITURE INVOLVES NON FLEXIBLE LONG TERM COMMITMENT OF THE FUNDS
7. MEANING OF CAPITAL BUDGETING
8. CAPITAL BUDGETING INVOLVES THE PLANNING AND CONTROL OF CAPITAL EXPENDITURE
9. ALSO KNOWN AS INVESTMENT DECISION MAKING,CAPITAL EXPENDITURE DECISION,PLANNING CAPITAL EXPENDITURE AND ANALYSIS OF CAPITAL EXPENDITURE
10. ACCORDING TO CHARLES T. HORNGREN,” CAPITAL BUDGETING IS THE LONG TERM PLANNING FOR MAKING AND FINANCING PROPOSED CAPITAL OUTLAY
11. MILTON H SPENCER,” CAPITAL BUDGETING INVOLVES THE PLANNING OF EXPENDITURE FOR ASSETS, RETURN FROM WHICH WILL BE REALIZED IN FUTURE TIME PERIOD.

• FEATURES

1. INVOLVES THE EXCHANGE OF CURRENT FUNDS FOR THE BENEFITS TO BE ACHIEVED IN FUTURE
2. EXPENDITURE IS MADE AT ONE POINT OF TIME BUT THE BENEFITS IS TAKEN FOR MANY YEARS
3. INVESTMENT OF FUNDS FOR NON FLEXIBLE AND LONG TERM ACTIVITIES
4. LONG TERM IMPACT ON THE PROFITABILITY OF THE CONCERN
5. INVOLVE HUGE FUNDS
6. IRREVERSIBLE DECISIONS
7. STRATEGIC INVESTMENT DECISIONS

• COMPONENTS OF CAPITAL BUDGETING
• CASH OUTFLOW/OUTLAY:-

1. THE AMOUNT TO BE INVESTED IN THE PROJECT INITIALLY OR DURING THE LIFE TIME OF THE PROJECT
2. NOT ONLY THE COST OF THE ASSET IS IMPORTANT BYOTHER EXPENDITURE LIKE TRANSPORTATION COSTS,INSTALLATION COSTS AND WORKING CAPITAL MGMT IS ALSO VERY IMPORTANT

• CASH INFLOWS:-THE EXPECTED BENEFITS FROM THE INVESTMENT TRANSLATED IN MONETARY TERMS AND THE BENEFITS WILL BE DIFFERENCE OF ESTIMATED REVENUES TO BE EARNED AND ESTIMATED COSTS TO BE INCURRED DURING A FUTURE PERIOD OF TIME
• CUT OF RATE:- THE MINIMUM RATE OF RETURN WHICH THE FIRM WOULD EXPECT TO HAVE FOR ACCEPTING A PROPOSAL SHOULD BE PREDETERMINED
• RANKING OF PROPOSALS: RANKING OF DIFFERENT INVESTMENT PROPOSALS IN ORDER TO PRIORITY WILL HELP THE MGMT IN TAKING APPROPRIATE DECISIONS
• RISK  AND UNCERTAINTY” FUTURE IS UNCERTAIN. SUITABLE STEPS SHOULD BE TAKEN FOR THE ASSESSMENT OF RISK AND UNCERTAINTY
• NEED AND SIGNIFICANCE

1. CAPITAL BUDGETING DECISIONS GENERALLY INVOLVE LARGE INVESTMENT OF FUNDS, BUT THE FUNDS AVAILABLE WITH THE FIRMS ARE LIMITED SO IT IS VERY IMPORTANT FOR FIRM TO PLAN AND CONTROL OF CAPITAL EXPENDITURE
2. LONG TERM COMMITMENT OF FUNDS:- NOT ONLY INVOLVE LARGE INVESTMENT OF FUNDS BUT ALSO FUNDS ARE REQUIRED FOR LONG TERM COMMITMENT WHICH INCREASES THE FINANCIAL RISK
3. IRREVERSIBLE NATURE:- DECISIONS ARE OF IRREVERSIBLE NATURE
4. LONG TERM EFFECT ON PROFITABILITY: UTMOST IMPORTANT TO AVOID OVER INVESTMENT OR UNDER INVESTMENT
5. LONG TERM DECISIONS ARE DIFFICULT  BECAUSE OF HIGH DEGREE OF RISK AND UNCERTAINTIES OF FUTURE.
6. NATURE OF THE INVESTMENT DECISIONS ARE IMPORTANCE OF NATIONAL IMPORTANCE BECAUSE OF EMPLOYMENT,ECONOMIC ACTIVITIES AND ECONOMIC GROWTH

• TYPES OF INVESTMENT DECISIONS

·         EXPANSION AND DIVERSIFICATION: A COMPANY MAY ADD TO ITS EXISTING PRODUCT LINES TO EXPAND EXISTING OPERATIONS

·         IT COULD BE RELATED EXPANSION OR EXPANSION IN NEW BUSINESS

·         IF A PACKAGING MANUFACTURING COMPANY INVEST IN NEW PLANT AND MACHINERY TO PRODUCE BALL BEARING WHICH THE FIRM HAS NOT EARLIER MANUFACTURED IS A CASE OF UNRELATED DIVERSIFICATION

·         REPLACEMENT AND MODERNIZATION: THE MAIN OBJECTIVE IS TO IMPROVE OPERATING EFFICIENCY AND REDUCE THE COST

·         COST SAVING WILL BE REFLECTED IN INCREASED PROFIT, REPLACEMENT DECISIONS HELP TO INTRODUCE MORE EFFICIENT AND ECONOMICAL ASSETS, REPLACEMENT DECISIONS THAT INVOLVE SUBSTANTIAL MODERNIZATION AND TECHNOLOGICAL IMPROVEMENT EXPAND REVENUE AND REDUCE COSTS

• TYPES OF CAPITAL BUDGET DECISIONS
• MUTUALLY EXCLUSIVE INVESTMENT:
• SERVE THE SAME PURPOSE AND COMPETE WITH EACH OTHER
• IF ONE INVESTMENT IS UNDERTAKEN AND THEN OTHERS WILL HAVE TO BE EXCLUDED
• INDEPENDENT INVESTMENT:-SERVE DIFFERENT PURPOSE AND DO NOT COMPETE WITH EACH OTHER
• DEPENDING ON THEIR PROFITABILITY AND AVAILABILITY OF FUNDS,THE COMPANY CAN UNDERTAKE INVESTMENT DECISIONS
• CONTINGENT INVESTMENT:-DEPENDENT PROJECTS
• THE CHOICE OF ONE INVESTMENT NECESSITATES UNDERTAKING ONE OR MORE OTHER INVESTMENTS

• PROCESS

1. IDENTIFICATION OF INVESTMENT PROPOSALS: MAY ORIGINATE FROM THE TOP MGMT OR MAY CAME FROM THE RANK AND FILE WORKER. THE DEPARTMENTAL HEAD ANALYSE THE IDEAS AND SUBMISSION TO CAPITAL EXPENDITURE PLANNING COMMITTEE
2. SCREENING THE PROPOSAL:-SCREENING FROM VARIOUS ANGLES TO KNOW THE VIABILITY
3. EVALUATION OF VARIOUS PROPOSAL: ON THE BASIS OF SUITABLE METHODS
4. FIXING PRIORITIES;- RANKING OF VARIOUS PROPOSAL AND TO ESTABLISH PRIORITIES AFTER CONSIDERING URGENCY,RISK AND PROFITABILITY
5. IMPLEMENTING THE PROPOSAL
6. PERFORMANCE REVIEW:-POST COMPLETION AUDIT