Definition and Explanation of Capital Budgeting
Definition and Explanation of Capital Budgeting:
Learning Objective of this article:
 Define and explain the term “capital budgeting”.
 What is meant by the term “investment in capital budgeting decisions”? Explain with examples.
The term “capital budgeting” is used to describe how managers plan significant outlays on projects that have longterm implications such as the purchase of new equipment and the introduction of new products.
Most companies have many more potential projects than can actually be funded. Hence, managers must carefully select those projects that promise the greatest future return. How well managers make these capital budgeting decisions is a critical factor in the long run profitability of the company.
Capital budgeting involves investments. A company must commit funds now in order to receive a return in the future. Investment is not limited to stocks and bonds. Purchase of inventory or equipment is also an investment.
Examples of Investments:
 TriCon Global Restaurants, Inc. makes an investment when it opens anew Pizza Hut restaurant.
 L. L. Bean makes an investment when it installs a new computer to handle customer billing.
 DiamlerChrysler makes an investment when it redesigns a product such as the Jeep Eagle and must retool its production lines.
 Merck & Co. invests in medical research.
 Amazon.COM makes an investment when it redesigns its website.
All of these investments are characterized by a commitment of funds today in the expectation of receiving a return in future in the form of additional cash inflows or reduced cash outflows.
You may also be interested in other articles from “capital budgeting decisions” chapter:
 Capital Budgeting – Definition and Explanation
 Typical Capital Budgeting Decisions
 Time Value of Money
 Screening and Preference Decisions
 Present Value and Future Value – Explanation of the Concept
 Net Present Value (NPV) Method in Capital Budgeting Decisions
 Internal Rate of Return (IRR) Method – Definition and Explanation
 Net Present Value (NPV) Method Vs Internal Rate of Return (IRR) Method
 Net Present Value (NPV) Method – Comparing the Competing Investment Projects
 Least Cost Decisions
 Capital Budgeting Decisions With Uncertain Cash Flows
 Ranking Investment Projects
 Payback Period Method for Capital Budgeting Decisions
 Simple rate of Return Method

Post Audit of Investment Projects
 Inflation and Capital Budgeting Analysis
 Income Taxes in Capital Budgeting Decisions
 Review Problem 1: Basic Present Value Computations
 Review Problem 2: Comparison of Capital Budgeting Methods
 Future Value and Present Value Tables
Other Related Accounting Articles:
 Time Value of Money
 Typical Capital Budgeting Decisions
 Ranking Investment Projects – The Preference Decisions
 Postaudit of Investment Projects
 Internal Rate of Return (IRR) Method in Capital Budgeting Decisions
 Capital Budgeting Decisions With Uncertain Cash Flows
 Capital Investment Appraisal Technique
 Payback Period Method for Capital Budgeting Decisions
 The Use of Venture Capital Funding for Business Expansion
 Capital Expenditure
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