Financial Management and Capital Budgeting

capital budgeting decision advantages

What is Capital Budgeting?

In financial management, Capital budgeting is the process which enables the management to decide which, when and where to make long-term investments. Businesses always look for opportunities that increase shareholder wealth. In capital budgeting, the managers try to figure out investment opportunities that are worth more to the business than they cost to acquire.

financial management, capital budgeting decision advantages

Project Selection Criteria

Ideally, firms should peruse all such projects that have good potential to increase the business worth. Since the  available capital at any given time is limited; therefore, it restricts the management to pick out only certain projects. They select any project by using capital budgeting techniques in order to determine which project has potential to yield the most return over an applicable period of time. 

With the help of capital budgeting techniques, management decides whether to accept or reject a particular project by analyzing the cash flows generated by the project over a period of time and its cost. Management decides in favor of project if the value of cash flows generated by the project exceeds the cost of undertaking that project. 

Capital Budgeting Decision Rules

A Capital Budgeting Decision rule is likely to satisfy the following criteria:

Regardless of the specific nature of an investment opportunity under consideration, management must be concerned not only with how much cash they are expecting to receive, but also when they expect to receive it and how likely they are to receive it.

Evaluating the size of the investment, timing; when to take that investment, and the risk involved in taking particular investment is the essence of capital budgeting.

Five Methods of Capital Budgeting

The most commonly used capital budgeting techniques are:

  1. Internal Rate of Return
  2. Net Present Value
  3. Profitability Index
  4. Accounting Rate of Return
  5. Payback Period

Would you mind finding more about the Best Capital Budgeting Technique for analyzing your project’s worth?

2 thoughts on “Financial Management and Capital Budgeting

  1. Nancey Capito

    I really enjoyed this. You can look your article comments. This information has really been helpful for most of the readers. I really appreciate the way you have written about this. I will really like to read more on this from you. I know your expertise on this. I must say we should have an online discussion on this. Writing only comments will close the discussion straight away! And will restrict the benefits from this information.

  2. Olivia Blanton

    Thanks for your informative stuff. Every now and then, the best knowledge originate from the websites a person would not expect. So far, I did not give much thought to posting comments on weblog articles and have left opinions even less. Checking out your useful page, will motivate me to do so more often.


Leave a Reply