define capital investment budgetingSolutionCapital Investmen

define capital investment budgeting

Solution

Capital Investment Budgeting is a broad aspect. But in very simple and layman words can be defined as evaluation of an investment, considering its costs incurred and returns generated in future.

Capital investment Budgeting is a process of planning, evaluating and controlling investments in ones assets. Now this is generally referred to as investments in long term assets or projects and evaluating returns from those projects. But I consider this very broadly as simply taking an investment decision for our capital and that not has to be the long term assets necessarily. Whenever we go for any investment decision we consider aspects such as the cost incurred today and the returns that we are going to get over a period of time along with the opportunity cost of our investment. We find out the present value o those future returns/ earnings that we would be getting and we see if those present benefits exceed our costs or not. If it does then we go for that investment.

Similar thing happens in Capital investment analysis. But when they do this, management of a company needs to be very careful. This is because this investment decision in certain projects would be affecting company\'s operations over a period of time. Also there is commitment of funds i.e company needs to pay out returns to those from where the capital has been raised to fund that project and they can be creditors and shareholders.

Now it depends on what things is management planning to do. If they are goinf for new products then accordingly R&D needs to be done for products and markets as well. What costs would be incurred for that new product. What sort of marketts would generate revenues for company. How much funds needs to raised and how much company has to pay them in return. All these aspects needs to be considered. Along with this a mutually exclusive analysis is also done for improving the existing products on the same line as we discussed for new product. Then management discusses on which would be a better choice to go on. This was an expansion analysis.

Similar analysis is done for replacement projects. Few items change in that. Depreciation of new and old assets needs to be considered here. Changes in Woking capital for new replaced project and the old one,both needs to be considered. Other items are same as above. Then similar analysis is carried out and decision is taken further.