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What is Capital Budgeting?

Capital budgeting is the process of evaluating and selecting long-term investment projects that involve significant capital expenditures. These projects typically include acquiring new assets, expanding existing facilities, developing new products, or other initiatives that impact a company’s long-term financial performance. Capital budgeting aims to allocate financial resources to projects expected to generate returns exceeding the cost of investment over an extended period.

Importance of Capital Budgeting in Accounting:

  1. Strategic Decision Making:
  1. Resource Allocation:
  1. Risk Management:

Advantages of Capital Budgeting:

  1. Profitability Enhancement:
  1. Long-Term Planning:

Disadvantages of Capital Budgeting:

  1. Complexity:
  1. Uncertainty:

Example of Budgeting for a Wholesaler or Retailer Business:

Consider a retailer considering the expansion of its operations by opening a new store in a different location. The capital budgeting process for this expansion involves:

  1. Cost Estimation:
  1. Revenue Projections:
  1. Cash Flow Analysis:
  1. Discounted Cash Flow (DCF) Analysis:

By evaluating these aspects, the retailer can make an informed decision about whether the expansion project aligns with its long-term goals and financial objectives. Capital budgeting helps in ensuring that the chosen investment will enhance overall business value.

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