Capital Budgeting Decision Process

Capital budgeting decision process

Capital Budgeting is a process of planning expenditures on assets for those cash are expected to use for many years and is used to identify how managers plan significant expenditures on projects which will have long-term implications. Capital Budgeting projects include investments in property, plant and equipment, research and development projects, large advertising campaigns or other project which requires capital expenditure and produce a future cash flow.

The decision to accept or reject a capital budgeting project depends on the analysis of the cash flows generated by the project and its cost.

"Capital budgeting is the process of analyzing investment opportunities in long-term assets which are expected to produce benefits for more than one year."

(Peterson and Fabozzi, 2002)

Capital budgeting is the process of identifying, analyzing, evaluating and selecting between projects which are likely to have a large impact on firm's future cash flow and competitive advantages in the market. It also helps the management to determine the strategic position of the firm and make the correct decision.

The decision process is the important and critical as it helps the firm to secure their competitive position in the market and enhance value as to expand its business such as investing new equipment to produce the new products or improve its exist products.

As the result, capital budgeting decision process has a significant effect on the value of firm and its shareholders.

Aims of financial management and linkage to capital budgeting decision process

Financial management defines as the process to ensure the resources are used profitable and effective by acquiring and managing the assets to achieve the goals of the firm. The process involve forecasting and planning, making financial decisions, coordination and control, dealing with financial markets and risk management.

"A firm, first of all, should maximize the wealth of stockholders."

(Anthony, 1960 and Donaldson, 1963)

The primary goal of financial management is to maximize the shareholders' wealth and the value of the firm. Managements aim to ensure that the resources are used and allocated correctly between activities. Financial management helps the managers to control risky project, avoid incorrect decision and determine the possible investment by determining their costs of funding through financial management.

"Maximizing shareholder wealth means maximizing the flow of