thrilldhill

 Profile Answers by thrilldhill 

• Jun 1st, 2007

 

Capital Budgeting is a way to justify capital expenditures.  It's done to see if the added benefit of a capital purchase, ie increased revenue or decreased expense, exceeds the cost of capital.

vasudeo007

 Profile Answers by vasudeo007 

• Oct 6th, 2008

 

The word budget means financial planning activity.

Capital Budgeting means financial planning for long term capital expenses.

A company may think of diversification, backwardation, forwardation, merger and acquisition, setting up SBU etc.

For all these, there are expenses required which are of capital expense nature. They can be buying/renting premises, setting up machinery, paying royalty, patents etc.

Each such project is going to yield money in coming future. So companies have to pay very close attention to the amount of money any project is going to yield and also its tenure/frequency of money making.

The projects are ranked on following basis:
a.  Quickness of repayment - earlier repayment the better
b.  Quantum of money generated - more the money better
c.   Capital Expenses required - lower the expense better
d.  Cost of capital - the lower the cost of capital, better
etc.

There are few methods of capital budgeting. They are based on above criteria. If you specifically ask about them, then I will be able to elaborate on them.