Objectives of Capital Budgeting  

Following are the objectives of capital budgeting;

1. Shareholder’s wealth maximization:

In tune with objectives of financial management, its aim is selecting those projects that maximize shareholder’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 equipment’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.

financial management

May 27, 2017