CAPITAL BUDGETING

DECISIONS/LONG TERM
INVESTMENT DECISIONS
Dr. Ashalakshmi R K
Associate Professor
MACFAST
• Capital budgeting is selection of an asset or
an investment proposal .

• How much to invest in a long term asset?

• Benefits are likely to be available in future
• Assets can be either new or old /existing

• Factors : Cash flows of the project, cost of capital,

investment criteria involved
In short(importance) ……capital budgeting decisions
includes:
• Long term assets and their composition
• Long term growth and effects: Eg: Case of
expansion
• Large amount of funds involved
• Business risk of the firm(actual vs. expected cash
flow)
• Concept and measurement of cost of capital
• Irreversible decision
FEATURES OF CAPITAL BUDGETING
• 1) It involves high risk
• 2) Large profits are estimated
• 3) Long time period between the initial
investments and estimated returns
 CAPITAL BUDGETING PROCESS

A)Project identification and generation/planning:

• Potential investment ,SWOT
B) Project Screening and Evaluation:
• Cash inflows and cash outflows, CB techniques, appraisal
C) Project Selection:
• Maximise shareholders wealth
D) Implementation:
• Raising of funds, purchase of assets, deployment of
assets
E) Project Control:
• Feedback reports
F) Performance review
• Success or failure
 FACTORS AFFECTING CAPITAL BUDGETING:
• Availability of Funds
• Working Capital
• Structure of Capital
• Capital Return
• Management decisions
• Need of the project
• Accounting methods
• Government policy
• Taxation policy
• Earnings
• Lending terms of financial institutions
• Economic value of the project
 TYPES OF CAPITAL BUDGETING DECISIONS
• Replacement decisions
• Modernisation decision
• Expansion decision
• Diversification decisions
• Mutually exclusive decisions
• Accept reject decisions
• Contingent decisions/complimentary decisions