What is Capital Budgeting: Introduction - Managerial Accounting




What is Capital Budgeting?


Capital budgeting is the process of budgeting for the acquisition of "capital assets." In accounting, capital assets are assets that are depreciable (i.e. have a useful life beyond one accounting period). Four capital budgeting models that can be used to determine whether or not a capital investment is a viable investment: payback period, accounting rate of return, net present value and internal reate of return.

When a business is deciding on an investment, the business must consider and incorporate the concept of time-value-of-money (TVM). Time-value-of-money is simply the concept that money earns money over time.

The payback period and the accounting rate of return are used when making short-term investment decisions. These two models do not incorporate the time-value-of-money as these are short-term decisions and the time-value-of-money would not be relevant.

The money that will be used to purchase an investment can be earning money (i.e. interest). Therefore, businesses, when considering long-term investment decisions, must incorporate the time-value-of-money concept in long-term business decision making.

The net present value and internal rate of return models incorporate the time-value-of-money concepts.

When a business is considering a capital investment, the business must take into consideration any cash inflows and cash outflows.


Cash inflows:

  • future cash revenue generated from investment
  • future savings in ongoing cash operating costs resulting from investment
  • future residual value of asset

Cash outflows:

  • investments ongoing cash operating costs and refurbishment, repairs, and maintenance costs
  • new investment cost


Accounting lecture notes: http://tiny.cc/nw1enw

--

Thank you all for your wonderful support. Because of your support we have been able to reach and help numerous accounting students all over the world. Please continue to be a part of our mission to help other accounting students be successful by giving our videos thumbs up, giving comments and adding our videos to your favorites (click more info on the video).

Subscribe: http://www.youtube.com/subscription_center?add_user=routhwsuedu

Like me on Facebook and post any questions that you may have: http://www.facebook.com/TheAccountingDoctor

--

For more accounting/how to eLectures (and accompanying lecture notes) similar to Capital Budgeting: Introduction - Managerial Accounting video, blog, FAQs and accounting eBooks visit http://www.TheAccountingDr.com.

7 comments:

  1. Extremely helpful information. I really want such knowledge. I am glad that I found this information

    Capital Accounts Collection

    ReplyDelete
  2. Replies
    1. I am glad that you enjoyed the article on Capital Budgeting. I hope that you will check out my other accounting educational articles/videos and let me know of other topics that you might like to see as well. Please join my email list, follow me on twitter and subscribe to my YouTube channel to get notices of newly posted articles and videos.

      Delete
  3. hello, where can i find the video on payback period?

    ReplyDelete
    Replies
    1. I do not yet have the payback period video up yet. However, I do have to have it up soon. Please subscribe to my website (on the right side of this screen) and you will receive notifications when I post new videos.

      Delete
  4. One of the nice information about the What is Capital Budgeting: Introduction - Managerial Accounting.You really did a great job by posting it.Thanks.

    Find Business Capital

    ReplyDelete
    Replies
    1. Thanks Debbie! I am glad that you enjoyed my video lecture on Capital budgeting. I hope that you will find my other videos as equally enjoyable.

      Delete