Capital Budgeting, Decision Process, Procedure, Definition. Capital budgeting is the process by which the financial manager decides whether to invest in specific capital projects or assets. In some situations, the process may entail in acquiring assets that are completely new to the firm. In other situations, it may mean replacing an existing obsolete asset to maintain efficiency. During the capital budgeting process answers to the following questions are sought: What projects are good investment opportunities to the firm?
Components of Capital Budgeting Initial Investment Outlay:It includes the cash required to acquire the new equipment or build the new plant less any net cash proceeds from the disposal of the replaced equipment. Net Cash benefits or savings from the operations: This component is calculated as under:-(The incremental change in operating revenues minus the incremental change in the operating cost = Incremental net revenue) minus (taxes) plus or minus (changes in the working capital and other adjustments). Mines Magazine » The Colorado School of Mines Magazine Website. Elsevier. The National Academies: Advisers to the Nation on Science, Engineering, and Medicine. Mechanical Engineer Students Resource Site.