Role Of Capital Budgeting In Financial Decision-Making

(role of capital budgeting in financial management, cost of capital in financial management)

The very definition of capital budgeting emphasizes its importance in every financial decision-making process. Capital budgeting is a systematic process used to critically analyze and evaluate the merits and demerits of an investment plan. Hence, any decision, whether to accept or reject any part of the proposed investment plan is important, as it will affect the growth of the business.

Capital budgeting can be and should be applied to all businesses, irrespective of whether it is a private limited, public limited, voluntary, profit organization, not-for-profit organization, franchise, or others. This is because it not only gives a quantitative measure of the business’ future successes but it also gives an estimate of the value earned from the intangible assets that a business will need to accomplish in order to sustain.

How does Capital Budgeting help?

  1. It gives an exact idea of the rate of return that a particular investment plan will generate. In cases of not-for-profit organizations or other charitable activities, the rate of return will be measured against its intangible values such as public satisfaction, people’s goodwill, and others.

  2. It is the best way to track, measure, and account for any activity that involves the flow of money.

  3. It gives a better understanding of the different areas of risk that an investment plan will encounter in its due course.

  4. It also calculates the feasibility of a project before its launch, thus it is best to carry out capital budgeting at the start to estimate the profitability of any investment project.

  5. It is a good way to assess the effectiveness of all the decisions made during the investment plan and evaluate its effectiveness for future decisions.

  6. It helps in deciding the financial profitability and in preparing strategic goals for the investment option both in short and in long-term.

  7. It helps with decisions regarding new investment options, its evaluation, and preparation of the business model.

  8. Capital budgeting can be considered as an excellent tool to predict future cash flows and this, in turn, helps in deciding whether to accept an investment project or not.

  9. Based on the estimates and outcomes from a capital budget, decisions are made at different hierarchical and authoritative levels, thus enables the flow of information within an organization.

  10. Organisations are in a better position to make decisions regarding project approvals when the capital budget is in order.

Thus, it is evident that capital budgeting helps with both financial decisions and investment decisions.

Realty – To Invest Or Not To Invest

 

Even after five years of price growth in the housing sector, the housing market is still growing. Unbelievable though and some people feel that it could be a bubble ready to burst. However, the experts are of the opinion that the construction and selling activity in the US is going to surge ahead at a good rate.

The housing sector is growing

Reasons for growth in the housing sector are many and some of these are mentioned here-

  1. Low unemployment rates
  2. Demand is going up
  3. Supply of ready houses is less than demand or not adequate
  4. Reduction in both corporate and personal taxes

All these factors together are propelling the housing sector to a new level of expansion and prices will soar in the near future. From a studio apartment in New York to a huge four-bedroom house in the suburbs in California, all kinds of houses are seeing an encouraging pattern and their prices are going in only one direction, upwards. The year on year gains is increasing phenomenally.

What can you do?

When the sector is growing so well why should you be left behind? You can invest in the real estate business in a planned manner to get the maximum advantage from this boom.

  1. You can buy a rental property. You can buy and rent out some part or the entire property. Even if you take a mortgage, the rent and maintenance would cover that and some extra income will be there and later the property is yours to use the way you want.
  2. You can buy an old house. Repair, renovate and then sell at a higher price. This is not easy though and may need lots of hard work and patience.
  3. You can use a concept of crowdfunding. Sounds strange for a real estate. Here you can invest your money in a real estate company, or a particular project, through debt or equity. To lower the risks of your money invested in the project, ensure that you use only accredited projects and companies.
  4. You can invest in REITs, which are similar to a mutual fund, but in real estate.
  5. Last but not least, you can rent out some part of your property as a homestay and use it for making money.

The real estate market is looking very buoyant. Both new houses and existing homes are looking at an increase in prices and demand. With all aspects being favorable, this sector seems to be on the cusp of a boom. You must invest according to your capacity to take risks and the amount that you can easily spare or repay and find the best tax saving slabs as well. This is a great sector for long-term investment and you can easily invest in reality for great returns.