Capital Budgeting
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The definition of Capital Budgeting according to Wikipedia is the planning process used to determine a firms long term investments such as new machinery, replacement machinery, new plants or products, and research and development projects. (wikipedia.com)
Capital budgeting is used in making decisions regarding investments in the long term of the company. In order for a company to generate revenues for the future the long term funds that are raised by the company are used to invest in assets. Making these decisions can have either a positive or negative impact.
Capital Budgeting must be carefully planned and can take years to implement since this is a major investment. If the planning is not done properly or a bad decision is made it can cause unnecessary costs for the company.
Capital Budgeting is considered a managerial tool in which the financial
manger is to choose the right investment that has a satisfactory cash flows and rates of returns. In order to decide if the investment is worth undertaking they must evaluate, select the project, compare and be able to choose their options that will be beneficial. In other words they must make long-term decisions that involve a large expenditure, beneficial to the companys future and analyze potential addition to the fixed assets.
We are able to utilize this concept at home for several reasons. One of the
reasons is our future. Many of us invest in a 401-K or some other type of
investment that will give us a satisfactory cash flow to live on when we
retire. We must make a decision on the type of investment and rate of
return.
Buying a home is a long term investment. We must first look at our budget to see if we are able to afford the extra expenditure.