Management Notes

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Importance of Capital Budgeting – Financial Management | Management Notes

Importance of Capital Budgeting

Importance of Capital Budgeting 

What is the concept of capital budgeting?

Capital Budgeting is the long term investment planning, analyzing, and decoding process used to evaluate and select capital expenditures consistent with the firm’s goal of owner wealth maximization. Capital expenditures are the long term investments made to expand, replace, or renew fixed assets or to obtain some other less tangible benefit.

Capital Budgeting Process

The capital budgeting process contains five distinct but interrelated steps beginning with proposal generation, followed by review and analysis, decision making, implementation and follow up.

Capital Budgeting or investment decision requires special attention because the following reason can be explained in the following manner:

Why capital budgeting is needed?

1. Growth

A firm’s decision to invest in long term assets has a decisive influence on the rate and direction of its growth. A wrong decision can prove disastrous for the continued survival of the firm. On the other hand, inadequate investment in the asset would make it difficult for the firm to compete successfully and maintain its market share.

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