Ans. The capital budgeting decision is a decision on an expenditure of capital nature (as against revenue expenditure) which is intended to create physical assets. The assets are is turn expected to reap benefits to the company for years to come. The expenditure on monetary assets (like purchase of Bonds, Shares, Treasury bills, Debentures etc.) is not to be treated as a capital budgeting expenditure. Only investment in physical assets is appraised in capital budgeting while investment in monetary and financial assets is appraised under portfolio analysis.
Importance
Spending
money on capital assets is a very important decision that a finance manager is
required to make. Capital investment expenditure may be on Plant, Machinery
Equipment, Land, Buildings, Roads, and Bridges etc. Although spending money on
anything is important and prudence must be exercised in all such matters, but
spending money on capital assets is especially more important and the finance
manager is, therefore, required to be much more cautious in making such a
decision, for the following reasons;
(i)
It involves substantially higher amounts than for other routine expenses.
(ii)
The decision is irreversible, i.e. it is not possible to withdraw your steps
easily, once you have taken few steps in this regard.
(iii)
It has long term impact on the affairs of a company and it, infact, determines
the future of a company.
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