Capital budgeting is a decision situation where large funds
are committed (invested) in the initial stages of the project
and the returns are expected over a long period of time.
These decisions are related to allocation of investible funds
to different long-term assets.
Capital budgeting is a continuous process and it is carried
out by different functional areas of management such as
production, marketing, engineering, financial management
BASIC FEATURES OF CAPITAL
budgeting decisions have
These decisions involve substantial commitment of
These decisions are irreversible and require analysis
of minute details.
These decisions determine and affect the future
growth of the firm.
CAPITAL BUDGETING DECISION INVOLVES
o Estimation of costs and benefits of a proposal or of
o Estimation of the required rate of return, i.e., the cost
o Selection and applying the decision criterion.
• The process is designed to help policy makers:
– In the selection of a few capital projects from many
• From an inventory of capital projects to a capital budget
– In the timing of the expenditure to be incurred by the
– In fitting the selected capital projects into the overall
financial program of the government unit
• (1) Capital asset inventory (2) capital
improvement plan (3) long-term financial analysis
(4) capital budget
(1) Capital Asset Inventory
• An inventory and assessment of the existing capital facilities
– Degree of use
– Capacity / LOS
– Replacement cost
• The inventory of capital facilities helps to determine whether
the existing facilities are to be:
– Renewed, replaced, expanded, or retired
• It also helps to determine repair and maintenance needs and
1. ESTIMATION OF CASH FLOWS
The costs and benefits for a capital budgeting
decision situation are