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    The Capital Expenditure Decisions Have The Following Features

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    Yosephine Kurniaty
    Capital expenditure decisions involve large, long-term investments in fixed assets like property, buildings, or equipment that provide benefits over multiple years. They carry more risk than operational expenses and involve estimating future cash flows since outflows and inflows don't match up over time. Capital expenditures are evaluated through a budgeting process to prioritize projects that maximize returns and shareholder wealth while avoiding over- or under-investment in fixed assets.

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    The Capital Expenditure Decisions Have The Following Features

    Uploaded by

    Yosephine Kurniaty
    31 views3 pages
    Capital expenditure decisions involve large, long-term investments in fixed assets like property, buildings, or equipment that provide benefits over multiple years. They carry more risk than operational expenses and involve estimating future cash flows since outflows and inflows don't match up over time. Capital expenditures are evaluated through a budgeting process to prioritize projects that maximize returns and shareholder wealth while avoiding over- or under-investment in fixed assets.

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    Capital expenditure decisions involve large, long-term investments in fixed assets like property, buildings, or equipment that provide benefits over multiple years. They carry more risk than operational expenses and involve estimating future cash flows since outflows and inflows don't match up over time. Capital expenditures are evaluated through a budgeting process to prioritize projects that maximize returns and shareholder wealth while avoiding over- or under-investment in fixed assets.

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    31 views3 pages

    The Capital Expenditure Decisions Have The Following Features

    Uploaded by

    Yosephine Kurniaty
    Capital expenditure decisions involve large, long-term investments in fixed assets like property, buildings, or equipment that provide benefits over multiple years. They carry more risk than operational expenses and involve estimating future cash flows since outflows and inflows don't match up over time. Capital expenditures are evaluated through a budgeting process to prioritize projects that maximize returns and shareholder wealth while avoiding over- or under-investment in fixed assets.

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    Capital expenditure decisions are just the opposite of operating

    expenditure decisions. It is the planning, evaluation and selection of


    capital expenditure proposals, the benefits of which are expected to
    accrue over more than one accounting year.

    The capital expenditure decisions have the following


    features:
    i. They involve large amounts of funds.

    ii. They involve greater amount of risk.

    iii. Capital expenditure decisions are irreversible.

    iv. Cash outflows and inflows occur at different points of time.

    Meaning of Capital Expenditure Decisions:


    The capital expenditure decision is the process of making decisions
    regarding investments in fixed assets which are not meant for sale
    such as land, building, plant & machinery, etc. Thus it refers to long-
    term planning for proposed capital expenditures and includes raising
    of long-term funds and their utilization. The key function of the
    finance manager is selection of the most profitable project for invest-
    ment. This task is very crucial because any action taken by the
    manager in this area affects the working and profitability of the firm
    for many years to come.

    Nature of Capital Expenditure Decisions:


    Capital expenditure decisions involve acquisition of assets that have a
    long life span and which provide benefits spread over a long period of
    time.
    The nature of capital expenditure decisions can be explained
    in brief as under:
    i. Substantial Investments:
    Capital expenditure decisions involve large amounts of funds. Such
    decisions have its effect over a long span of time.

    ii. Irreversible Decision:


    Capital expenditure decisions once approved represent long term
    investments that cannot be reversed or withdrawn any time.
    Withdrawal or reversal of such decisions may lead to considerable
    financial losses to the firm.

    iii. Estimation of Future Cash Inflows:


    Preparation of capital expenditure budget involves forecasting of cash
    inflows over several years for evaluating the profitability of projects.

    iv. Maximization of Shareholder’s Wealth:


    It helps protect the interest of the shareholders as well as of the firm
    because it avoids over-investment and under-investment in fixed
    assets.

    Purpose of Capital Expenditure Decisions:


    The capital expenditure decision or capital budgeting is a process that
    plans to ascertain the long-term investments of the firm. The main
    purpose of capital budgeting is to recognize as well as prioritize capital
    investments on the basis of maximum returns to the business. It is
    also considered as a managerial tool required for efficient
    management of collected capital of the firm.
    Objectives of Capital Expenditure Decisions:

    Financing decisions are one of the most crucial and critical decisions
    of a firm as they have a significant impact on the profitability of the
    firm.

    There are number of objectives of capital expenditure


    decisions, some of which are:
    i. Increasing Output:
    Output may be increased by utilizing existing facility or through
    expansion by installing new plant and machinery.

    ii. Cost Reduction:


    The existence of a firm depends on profitability, which in turn
    depends on the production of goods or services at a reasonable price.
    This is possible if over/under-investment in fixed assets is avoided.

    iii. Providing Contemporary Goods:


    Consumer tastes change every day. To satisfy the new demands from
    customers, either proper utilization of existing facility or installation
    of the latest machinery is necessary—which is not possible without
    proper capital expenditure decision.

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