FACTORS TO BE CONSIDERED IN CAPITAL BUDGETING DECISIONS

Capital budgeting is the process of planning and controlling investments for longterm projects and programs.
The costs that are considered in capital budgeting analysis include:
1.

Avoidable cost cost that may be eliminated by ceasing an activity or by

improving efficiency.
2.
Common cost cost that is shared by all options and is not clearly allocable to
any one of them.
3.
Weighted-average cost of capital is the weighted average of the interest
cost of debt (net of tax) and the implicit cost of equity capital to be invested in longterm assets. It represents a required minimum return of a new investment to prevent
dilution of owners interest.
4.
Deferrable or Postponable cost cost that may be shifted to the future with
little or not effect on current operation.
5.
Fixed cost cost that does not vary with the level of activity within the relevant
range.
6.
Imputed cost cost that does not entail a specified peso outlay formally
recognized by the accounting system, but its nevertheless relevant to establishing the
economic reality analyzed in the decision-making process.
7.
Incremental cost is the difference in cost resulting from selecting one option
instead of another.
8.
Opportunity cost is the benefit forgone by not selecting the
best alternative use of scarce resources.
9.
Relevant cost future differential cost that vary with the action.
10.
Sunk cost cost that cannot be avoided because expenditure or an irrevocable
decision to incur the cost has been made.
11.
Taxes tax consequences of an investment.

FACTORS AFFECTING CAPITAL BUDGETING:

Availability of Funds

Working Capital

Structure of Capital

Capital Return

Management decisions

Need of the project

Accounting methods

Government policy

Taxation policy

Earnings

Lending terms of financial institutions

Economic value of the project