Capital Budgeting
      There  are  two  categories  of  investment  decisions,  investment  in 
       current assets and long term assets.
      The first one, i.e., working capital management has been covered in 
       Unit 2.
      The second category is investment in long term assets. This is called 
       Capital Budgeting Decision  and is the subject material of Unit 3.
      Fixed/Long Term assets refer to assets which are in business, and 
       yield a return, over a period of time, generally exceeding  one year.
      Capital  Budgeting  is  employed  to  evaluate  expenditure  decisions 
       which involve current outlays/investments but are likely to produce 
       benefits  over more than one year.
      Due to the above reason, all capital budgeting decisions are subject 
       to the consideration of time value of money.
      Investment in long term assets involve capital expenditure.
      Capital  Expenditure  is    an  outlay  of  funds  that  is  expected  to 
       produce benefits over a period of time exceeding one year.
                  Continued
     Capital  Budgeting  is    the  process  of 
      evaluating    and    selecting    long-term 
      investments that are consistent with goal of 
      shareholder wealth maximisation. It has the 
      following basic features:
      potentially large anticipated benefits
      Relatively high degree of risk
      Long period of time  between the initial  outlay 
       and anticipated returns.
    Importance of Capital Budgeting Decisions
     They  involve  investments  in  fixed/long  term 
      assets, they affect the profitability of the firm 
      as  the  productivity/profitability  of  a  firm 
      depends on the proper selection of long-term 
      assets.
     This decision affects the company’s future cost 
      structure.
     Capital  Investment  decisions  are  not  easily 
      reversible.
     Capital investment involves funds and majority 
      of firms have scarce resources. 
          Difficulties in Capital 
                   Budgeting
     Since  the  benefits  from  investments  are 
      received  in  some  future  period,  future  is 
      uncertain  and  hence  an  element  of  risk  is 
      involved.
     Costs incurred and benefits received occur in 
      different  time  periods,  hence  they  are  not 
      comparable. We have to adjust the benefits for 
      time value of money.
     Sometimes  it  is  not  possible  to  calculate  in 
      strict quantitative terms all the benefits or the 
      costs  related  to  a  particular  investment 
      decision.
       Capital Budgeting Decisions
     Rationale
     The  rationale  for  capital  budgeting 
     decision is efficiency.
     Effects
      
       Investment Decisions affecting Revenues
      
       Investment Decisions Reducing Costs