Importance of Capital
Budgeting:
Even if you are a small company, still capital budgeting can
draw down all the pro and cons of your capital spending. Normally capital budgeting
defines as a process that is used to determine whether an company’s long term
investment such as new machinery, replacement machinery, new plants, new
products, or even research and development projects are worth the funding of
cash through the firms capitalization structure. Capital budgeting process will
ensure proper allocation of your major investment.
There are many methods for evaluating your capital
expenditure such as:
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Accounting rate of return
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Payback Period
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Net Present Value Analysis
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Profitability index
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Internal rate of return
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Modified internal rate of return
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Equivalent annuity
If you are expending and would like to see how beneficial your capital expenditures or new projects are, we are here to help. We will use multiple techniques, and determine which one is best suited for your situation. For more information contact us at: 514-585-6848, or visit us at www.paulsandassociates.com.
Furthermore, capital expenditures can be very large and have a significant impact on your company’s financial performance. Besides, the investments take time to mature and capital assets are long-term, therefore, if a mistake were done in the capital budgeting process, it will affect your firm for a long period of time. For tax purposes, you have to claim CCA over time.
ReplyDeleteThe future success of your business largely depends on the investment decisions that you make today. Investment decisions may result in a major departure from what you have been doing in the past. Through making capital investments, your company acquires the long-lived fixed assets that generate your company’s future cash flows and determine its level of profitability. Thus, this decision greatly influences your company’s ability to achieve its financial objectives. For example, if your company invests too much it will cause higher depreciation and expenses. On the other hand, if your firm does not invest enough, your firm will face a problem of inadequate capacity and thus, lose its market share to its competitors.
Factors that have Influences on Capital Budgeting are the following:
• Availability of funds
• Structure of capital
• Taxation Policy
• Government Policy
• Lending Policies of Financial Institutions
• Immediate need of the Project
• Earnings
• Capital Return
• Economic Value of the Project
• Working Capital
• Accounting Practice
• Trend of Earning
For more information check out www.paulsandassociates.com.