PRESENTED BY: USHBA SABIHA What are prerequisites ?
• A thing that is required as a prior condition for
something else to happen or exist • Something that must exist or happen before something else • A basic requirement • A necessity Capital
• Capital is the result of human efforts made, on
natural resources and includes all those goods (items or commodities) which are used for further production of more goods, e.g., machines, tools, factory buildings, transport equipment, etc. Budgeting • A budget is basically a financial plan for a defined period, normally a year. It is an estimation of revenue and expenses over a specified future period of time and is utilized by governments, businesses and individuals. • A budget is a microeconomic concept that shows the trade-off made when one good is exchanged for another (Economic point-of-view) What is Capital Budgeting ?
• Capital budgeting is a process that helps in planning the
investment projects of an organization in long run. • The decision of whether to accept or deny an investment project as part of a company's growth initiatives. • Capital budgeting is a reconciliation between the marginal revenue and marginal cost. Marginal revenue represents the percentage rate of return on investment while marginal cost is the cost of capital to the business. (Economics point-of-view) PREREQUISITES OF CAPITAL BUDGETING
1. Determining Capital Expenditure:
Organization needs to define its total capital expenditure for purchasing various fixed assets. In capital budgeting, only long-term capital expenditure is taken into account. 2. Determining the Planning Period: The duration of any capital expenditure include a high degree of risks. Therefore, an organization needs to clearly define the planning period of capital expenditure. 3. Selecting Decision Rules: Decision rules are generally selected on the basis of goals of an organization, such as profit maximization and minimization of cost. Therefore, before deciding criteria for decision rule, it is required to define the objectives of investment and then selecting criteria for the evaluation of project. 4. Collecting Data: An organization needs to collect relevant, accurate, and sufficient amount of data to make the capital budgeting process successful. i. Determining different investment opportunities ii. Assessing the cost associated with investment iii. Calculating the expected rate of return from investment iv. Knowing the productive life of project v. Becoming aware of the rate of interest in market vi. Ensuring the availability of funds 5. Risks: Uncertainties, such as economic recession, inflation, and change in technology, should be taken in account by an organization during the selection of a project. These risks may affect the profitability of the project to a large extent
6. Irreversibility of Investment Decisions:
Organization cannot change or withdraw its investment decisions taken once, as it may cause financial losses. Moreover, changing the investment decisions may affect the goodwill of the organization. Therefore, the organization should be careful, while making project selection decisions. Q&A THANK YOU