Capital Budgeting

You have learnt about the capital investment decisions and different types in the earlier lesson. In this lesson, you will know the about capital budget and various techniques.

It is the fund required in any investment. The budget is derived from a French word “Bougette” representing a leather pouch into which funds are appropriated to meet the anticipated expenses. The process is called budgeting. It may be said that budget is a

• Statement of management policy for a finite period of time.
• Translates policy into actions to achieve the policy
• Provides a standard of comparison with results actually achieved
• It is not (purely) an accounting statement.

The budget is prepared on the basis of the forecast. Fore cast is a mere estimate about what is likely to happen. The net present value criterion is the most valid technique of evaluating an investment project. It is generally consistent with the objective of maximizing the shareholders’ wealth.