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Capital Budjeting

In: Business and Management

Submitted By to0o0ta
Words 1727
Pages 7
Table of Contents

Definition of capital budgeting 2
The Major Capital Budgeting Techniques 4
Payback Period 4
Internal Rate of Return 7
Factors Influencing Capital Budgeting 7
Need For Capital Budgeting 7
Capital budgeting project 8
References 9

Definition of capital budgeting

Capital budgeting is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structure (debt, equity or retained earnings). Planning the eventual returns on investments in machinery, real estate and new technology are all examples of capital budgeting.
Management must allocate the firm's limited resources between competing opportunities (projects), which is one of the main focuses of capital budgeting. Capital budgeting is also concerned with the setting of criteria about which projects should receive investment funding to increase the value of the firm, and whether to finance that investment with equity or debt capital. Investments should be made on the basis of value-added to the future of the corporation. Capital budgeting projects may include a wide variety of different types of investments, including but not limited to, expansion policies, or mergers and acquisitions. When no such value can be added through the capital budgeting process and excess cash surplus exists and is not needed, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program.
Choosing between capital budgeting projects may be based upon several inter-related criteria. (1) Corporate management seeks to maximize the value of the firm by investing in projects which yield a

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