M M HASSAN-ID NO: 200830082

Asian University of Bangladesh (AUB)

dashingmmhassan.2021@gmail.com
mmhassan.antor@gmail.com
mmhassan.antor@yahoo.com
Question: Define-Capital Budgeting.
Answer:
Capital budgeting is process of selecting best long term investment project. Capital budgeting is
the process of determining whether a big expenditure is in a company's best interest. Here are the
basics of capital budgeting and how it works.
Question: Steps of capital budgeting.
Answer:
Introduction: A proper investment analysis must proceed through the following consecutive
steps:
1. Project Identification/Proposal Generation: Projects are identified through a search of investment
opportunities. The prospective investor could carry on this step either through collecting this information from
development organizations who are engaged in developing full projects, through borrowing ideas from well to do
investors in the country and abroad, or/and through inventing new project ideas.
2. Project Formulation/review & Analysis: Once a list of projects is ready each project in it
must have a blue print providing detail of the requirements of various assets such as land,
buildings, plant and machinery, raw materials, labor, etc. and their price tags together with the
expected capacity utilization over time and the products process among other things.
3. Project Appraisal and selection/decision Making: The feasible projects are then appraised
in terms of their economic viability. This step is carried out through first projecting cash flows
from each project and the comparing them through the use of measures of investment worth
discussed the pervious section.
4. Project Implementation and Monitoring: The selected project(s) is (are) then implemented
in terms of arranging of finance, purchasing of land, plant and machinery, etc., construction of
buildings, hiring of labor and other staff etc. While implementing the project and after it is
commissioned for commercial production, the investor must monitor the project on a regular
basis. During the running period of the project there is ample need for close monitoring
5. Project Evaluation or Post-completion audit/Follow Up: The last step in capital budgeting
called project evaluation is concerned with the post-completion audit of the project. In this step
the investor examines the validity of his decision. This he does by re-computing the measures of
investment worth, this time on the basis of actual cash flows rather than expected cash flows of
the project appraisal stage.
Conclusion: It would now be obvious that a proper investment analysis requires the knowledge
of various disciplines; technical (engineering), economics, finance, business forecasting, etc.
M M HASSAN-ID NO: 200830082
Asian University of Bangladesh (AUB)
dashingmmhassan.2021@gmail.com
mmhassan.antor@gmail.com
mmhassan.antor@yahoo.com
Question: Discuss about the importance of capital budgeting.
Answer: Introduction: A company undertakes capital budgeting in order to make the best
decisions about utilizing its limited capital. The capital budgeting decisions are important, crucial
and critical business decisions due to following reasons:
1) Evaluate Opportunities: Once you have identified the reasonable opportunities, you need to
determine which ones are the best. Look at them in relation to your overall business strategy and mission.
2) Substantial expenditure: Capital budgeting decisions involves the investment of substantial
amount of funds. It is therefore necessary for a firm to make such decisions after a thoughtful
consideration so as to result in the profitable use of its scarce resources. The hasty and incorrect
decisions would not only result into huge losses but may also account for the failure of the firm.

3) Long time period: The capital budgeting decision has its effect over a long period of time.
These decisions not only affect the future benefits and costs of the firm but also influence the
rate and direction of growth of the firm.

4) Irreversibility: Most of the investment decisions are irreversible. Once they are taken, the
firm may not be in a position to reverse them back. This is because, as it is difficult to find a
buyer for the second-hand capital items.

5) Complex decision: The capital investment decisions involve an assessment of future events,
which in fact is difficult to predict. Further it is quite difficult to estimate in quantitative terms all
the benefits or the costs relating to a particular investment decision.

6) Helps firms to plan its financing: Proper capital budgeting analysis is critical to a firms
successful performance because capital investment decisions can improve cash flows and lead to
higher stock prices. Yet, poor decisions can lead to financial distress and even to bankruptcy.
Although a tactical investment decision generally involves a relatively small amount of funds.
7) Involvement of large amount of funds: Capital budgeting decisions need substantial amount
of capital outlay. This underlines the need for thoughtful, wise and correct decisions as an
incorrect decision would not only result in losses but also prevent the firm from earning profit
from other investments which could not be undertaken.
8) Risk and uncertainty: Capital budgeting decision is surrounded by great number of
uncertainties. Investment is present and investment is future. The future is uncertain and full of
risks. Longer the period of project, greater may be the risk and uncertainty. The estimates about
cost, revenues and profits may not come true.
9) Difficult to make: Capital budgeting decision making is a difficult and complicated exercise
for the management. These decisions require an overall assessment of future events which are
uncertain.