Question

1. What are some examples of capital assets that should be incorporated in the capital expenditure

budget?

2. Why is timing of capital budget outlays particularly important?

Answer 1

.1 Examples of Capital assets that should be incorporated in capital expenditure budget:

• Up gradation of existing assets to increase useful life or efficiency
• Purchase of Equipments
• Construction of Plant and Building
• Purchase of Land
• Building a new factory for a new product or expansion of existing product

.2 Timing of the capital budget outlay is very important.

The assets must be available for use when needed. At the same time, the assets should not lie idle.

Right type of capital expenditure at the right time has significant impact on shareholder value.

If the market demand is expected to increase in future, the capital expenditure must ne made in time , so that the equipments are available in time.

Since, the Capital assets have long lead time to construct or purchase, timing of investment is important.

The core sector like steel , cement etc typically follow business cycles. It is important to understand the cycle, so that investments in plants can be made when capital assets are cheap and the assets are ready for production when there is upswing in the market