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Fundamentals of Financial Management, Third Edition by Vyuptakesh Sharan

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5.1 NATURE OF CAPITAL BUDGETING

5.1.1 Meaning and Significance

Capital budgeting relates to long-term investment in fixed assets. Capital refers to long-term assets used in production. The budget is a plan detailing projected inflows and outflows of cash during a specific future period. It is different from an operating budget in that it usually involves a number of years, while an operating budget is confined to one fiscal year.

Capital budgeting decisions are significant for a firm. First, fixed assets account for a sizeable proportion of the firm’s total assets and their life extends over a considerable number of years. If wrong decisions are taken, the amount of loss will be colossal. Second, long-term assets are usually specialised. This ...

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