Capital Budgeting refers to the process of planning expenditures that give rise to revenues or returns over a number of years. The process of investment #analysis is essential to have a sustainable advantage in the competitive market and to stabilize the profits through resourceful strategic business units. The firm’s #management must be on the alert to explore the opportunities present in the market. Obsolete product lines and changes in consumer tastes may present additional problems to a business enterprise affecting the profitability and growth. When a firm decides to venture into projects that demand huge investments, the management has to scrutinize the #economic feasibility of such projects.
The process of #capital investment is also crucial because the projects are for the most part irreversible. Say, for example, if a business firm purchases a special type of #machinery, and after installation, if the firm reverses its decision to sell the #merchandise due to some technical reasons, it will have only a very small second hand value. Business firms based on the #cash flow of the project and the capital recovery period do long-term investment.
The proposals for new projects come from the internal environment, such as department heads, executives, employees and of course the management. Experts in product development, marketing research, industrial engineering examine the investment proposals and they may regularly meet with the heads of other divisions in brainstorming sessions to zero in on the proposals.
While the firm’s top management makes the final say or decision to undertake or not a major investment project, the process is likely to involve most of the firm’s divisions. Each department has to present its view on the feasibility and viability of the project.
Thus, the process of expenditure analysis can truly be said to integrate the operation of all the major divisions of the firm.