A review of Process of Capital Budgeting and effect of Inflation on Capital Budgeting

Abstract

“Capital budgeting is the process through which a company decides which fixed asset acquisitions to approve and which to reject. This procedure is used to provide a quantitative perspective of each proposed fixed asset investment, providing a logical foundation for making a decision”. In contrast to certain other forms of investment analysis, capital budgeting is concerned with cash flows rather than profits. Capital budgeting entails identifying the cash inflows and outflows associated with the investment, rather than accounting for the revenue and expenditure streams associated with the investment. For instance, capital budgeting includes non-expense items such as loan principal payments as cash flow transactions. Non-cash expenditures, on the other hand, such as depreciation are excluded from capital budgeting (save to the degree that they affect tax calculations for after-tax cash flows), since they are not cash transactions. Rather than that, the study includes the cash flow costs connected with the actual acquisition and/or financing of a capital asset.