Objectives of Capital Budgeting
Following are the objectives of capital budgeting;
1. Shareholderâ€™s wealth maximization:
In tune with objectives of financial management, its aim is selecting those projects that maximize shareholderâ€™s wealth. The decision should avoid over/under investment in fixed assets.
2. Evaluation of proposed capital expenditure:
Capital budgeting helps in evaluating expenditure to be incurred on various assets to measure validity of each expenditure
3. Controlling costs:
Controlling costs by evaluating expenditure costs can be controlled.
4. Determining priority:
Arranging projects in order of their profitability enabling the management to select most profitable project.
Factors affecting Capital Budgeting Decisions (CBD)
Factors affecting capital budgeting decisions are;
1. Technological changes:
Before taking CBD, management must undertake in-depth study of cost of new product /equipment as well productive efficiencies of new as well as old equipment.
2. Demand forecast:
Analysis of demand for a long period must be undertaken before CBD.
3. Competitive strategy:
If a competitor is going for new machinery /equipment of high capacity and cost effective, we may have to follow that.
4. Type of management:
If management is innovative, firm may go for new equipmentâ€™s/ investment as compared to conservative management.
5. Cash flow:
Cash flow statement or cash budget helps a firm in identifying time when a firm can make investment in CBD.
6. Other factors:
Like fiscal policy (tax concessions, rebate on investments)
political stability, global situation etc.
May 27, 2017