Capital budgeting is an important function of the senior management in an organization.
It is more prominent in big organizations especially those which is involved in acquisition or replacement of assets.
Generally the main purpose of acquiring these assets is to enable the organization to enjoy future benefits from them.
The assets can be either in financial or physical form.
When an organization is analyzing, reviewing and deciding on whether to acquire an asset, it can be said that it is involved in the process of capital budgeting.
Therefore, capital budgeting is the process of identifying, selecting and making investment decision on long lived assets that can generate future benefits of more than one year to the company.
There are a few important factors to consider when deciding on making investing in long-lived assets.
One of the most important factors is probably the capital outlay.
An organization needs to be clear about its financial status before making a decision on a capital investment.
Capital investment requires an immediate outlay of capital.
The return from it may not materialize within a short period.
Some of them take more than two years to see the benefit or return.
Therefore, it is very important that the organization, to analyze and make the correct investment decision.
An example would be to weight the amount of capital outlay versus the amount of return from the capital investment.
Some common examples of capital investments are: 1.
Acquisition of new long lived assets such as new property, new machinery or new motor vehicle.
2.
Investing into new software.
3.
Investing into project or joint venture business.
4.
Acquisition of new companies.
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