Question

Explain the process to prepare and develop a capital budget.

Answer 1

capital budget:- capital budget may be defined as the allocation of funds to acquire fixed assets like equipment, furniture, buildings etc. all most all the companies use this capital budget and its techniques to know the worth of investing in capital assets.The process of capital budgeting enables companies to know the long term investment in capital assets is worth.The following are the techniques used in capital budgeting.

1. Net present value
2. Internal rate of return
3. Accounting rate of return
4. Payback period
5. Profitability index

Process to prepare capital budget:-

Step 1:- First it is required to prepare the outline of all the objectives of a company then list out the present requirement of capital investment in order to grow. sort the requirements based on importance and set time frame to acquire.

step 2:- Analyse the current statement of cash flow and know the expenses and revenues of company.

step 3:- find the cost of expenditure required and check whether the cash that is in the company is enough to acquire the asset.The cash should also enough for paying interest payments if any.

step 4:- look after what are available alternatives of purchasing and select the one that is less cost.

step 5:- Should take into account the factors that will influence the budget by acquiring the capital budget as the cost that is made on capital assets increases the cost of company.

step 6:- prepare a Excel sheet with all the available data before taking decision. consider the items like present flow of cash into company, the capital required for acquiring the asset and the amount received when the asset is sold or disposed.