Investment Decision Is also known as Capital budgeting. The word Investment refers to the expenditure which is required to be made in connection with the acquisition and the development by which management selects those investment proposals which are worthwhile for investing available funds. When a business makes a capital investment,it incurs a cash outlay in the expectation of future benefits. The expected benefits generally extend beyond one year in the future. Out of different investment proposals available to a business,it has to choose a proposal that provides the best return and the return equals to,or greater than,that required by the investors. The whole process is known as Capital budgeting/expenditure.
Meaning and definition of capital budgeting
capital budgeting or capital expenditure budget is a process of making decision regarding investments in fixed assets which are not meant for sale such as land,buildings,machinery,furniture.
According to Charles T. Horngren, “Capital budgeting is long term planning for making and financing proposed capital outlays”.
According to Robert N.Anthony,“The capital budget is essentially a list of what management believes to be worthwhile projects for the acquisition of new capital assets together while the estimated cost of each product”.
Features of capital budgeting
- Investment proposal for which the capital budgeting technique is to be applied should be of a long-term nature.
- Proposed investment is to be made during the current period,but return from the investment will be obtained over a number of years in the future period.
- Investment decision may be taken for a single project proposal,or for two or more mutually exclusive project proposals.
- Acceptance or rejection of an investment proposal should be based on the maximization of value of the firm.
Objectives of Capital Budgeting
The following are the objectives of capital budgeting.
1. To find out the profitable capital expenditure.
2. To know whether the replacement of any existing fixed assets gives more return than earlier.
3. To decide whether a specified project is to be selected or not.
4. To find out the quantum of finance required for the capital expenditure.
5. To assess the various sources of finance for capital expenditure.
6. To evaluate the merits of each proposal to decide which project is best.