The investment decisions of a firm generally known as capital budgeting or capital expenditure decisions. A capital budgeting decision may be defined as the firm’s decision to invest its current funds most efficiently in the long term assets in anticipation of an expected flow of benefits over a series of year. The long term assets are those which affect the firm’s operations beyond the one year period. The firm’s investment decision would generally include expansion, acquisition, modernisation and replacement of long term assets. Sale of a division or business (Investment) is also analysed as an investment decision. Activities such as changes in the methods of sales distribution or undertaking an advertisement compaign or a research and development programme have long-term implication’s for the firm’s expenditure and benefits and therefore, they may also be evaluated as investment decisions.
1) The exchange of current funds for future lengths.
2) The funds are invested in long term assets.
3) The future benefits will occur to the firm over a series of year.