What Is Capital Budgeting
                     WHAT IS 
CAPITAL 
BUDGETING? 
WHAT IS CAPITAL 
BUDGETING?
Capital budgeting is the process that 
a business uses to determine which 
proposed fixed asset purchases it 
should accept, and which should be 
declined. 
This process is used to create a 
quantitative view of each proposed 
fixed asset investment, thereby 
giving a rational basis for making a 
judgment.
Source: www.accountingtools.com
CAPITAL BUDGETING TECHNIQUES
NET PRESENT 
VALUE ANALYSIS
Under net present value analysis, 
identify the net change in cash flows 
associated with a fixed asset 
purchase, and discount them to their 
present value. 
Then compare all proposed projects 
with positive net present values, and 
accept those with the highest net 
present values until funds run out. 
Source: www.accountingtools.com
CONSTRAINT 
ANALYSIS
Under constraint analysis, identify 
the bottleneck machine or work 
center in a production environment 
and invest in those fixed assets that 
maximize the utilization of the 
bottleneck operation. 
Source: www.accountingtools.com
PAYBACK PERIOD
Under the payback approach, 
determine the period required to 
generate sufficient cash flow from a 
project to pay for the initial 
investment in it. 
This is essentially a risk measure, for 
the focus is on the period of time 
that the investment is at risk of not 
being returned to the company. 
Source: www.accountingtools.com
AVOIDANCE 
ANALYSIS
Under avoidance analysis, determine 
whether increased maintenance can 
be used to prolong the life of 
existing assets, rather than investing 
in replacement assets. This analysis 
can substantially reduce a 
company's total investment in fixed 
assets. 
Source: www.accountingtools.com
PROCESS OF CAPITAL BUDGETING
IDEA GENERATION
The most important step of the 
capital budgeting process is 
generating good investment ideas. 
These investment ideas can come 
from a number of sources like the 
senior management, any 
department or functional area, 
employees, or sources outside the 
company.
Source: quickbooks.intuit.com
ANALYZING 
INDIVIDUAL 
PROPOSALS
A manager must gather information 
to forecast cash flows for each 
project in order to determine its 
expected profitability. 
This is because the decision to 
accept or reject a capital investment 
is based on such an investment’s 
future expected cash flows.
Source: quickbooks.intuit.com
PLANNING CAPITAL 
BUDGET
An entity must give priority to 
profitable projects as per the timing 
of the project’s cash flows, available 
company resources, and a 
company’s overall strategies. 
Source: quickbooks.intuit.com
THE IMPORTANCE 
OF CAPITAL 
BUDGETING
The amount of cash involved in a 
fixed asset investment may be so 
large that it could lead to the 
bankruptcy of a firm if the 
investment fails. Consequently, 
capital budgeting is a mandatory 
activity for larger fixed asset 
proposals. 
Source: www.accountingtools.com