Fm - Capital Expenditure

FINANCE MANAGEMENT

CHAPTER – 3

INTRODUCTION

A capital expenditure may be defined as an expenditure, the benefit of which is spread over a period exceeding one year. The main feature of a capital expenditure is that the heavy expenditure is incurred at one period of time while the benefits of the expenditure are spread at different points of time, in future. Capital expenditure involves exchange of current assets to acquisition of fixed assets. Some of the examples of capital expenditure are

(A) Purchase or acquisition of permanent assets such as machinery, building, goodwill etc.

(B) Cost of improvement, addition, expansion or alteration in the fixed assets.

(C) Cost of replacement of fixed assets.

(D) Research and development expenditure.

Capital expenditure decisions are also called as long-term investment decisions.

DEFINITION AND MEANING OF CAPITAL BUDGETING

Definition: The investment decisions of a firm are generally known as capital budgeting or capital expenditure decisions. Capital budgeting is concerned with allocation of the firm’s scarce financial resources in long-term projects, the benefits occur over a future period. Capital budgeting may be defined as the firm’s decision to invest current funds in long-term assets to get the benefits over the years.

The characteristics of capital budgeting or long–term Investment decisions are:

(A) Exchange of current assets for future benefits.

(B) Investment of funds in non-flexible and long-term assets or activities.

(C) Huge Funds are involved.

(D) Future benefits or cash flows occur over a series of years.

(E) Decisions are irreversible.

(F) Significant impact on the profitability of the concern.

NEED AND IMPORTANCE OF CAPITAL BUDGETING

Investment decisions are of great importance to any concern. These decisions involve commitment of a large sum of money. They affect the profitability of the enterprise,...