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Capital budgeting refers to the different decisions which managers take into account when executing financial tasks such as acquisition of new assets. It should be noted that this assets are expected to possess long term implications in the operation of the firm as a whole (Swan, 2008).
For instance, balance sheets are prepared to portray the book value of the assets involved and when it is perceived that these assets have depreciated in value it then becomes the duty of the financial personnel to decide on strategies of replacing them altogether. Statements of consolidated income are meant to depict the profitability of the firm. When it is perceived that the statements of income reflect profits, the financial personnel are thus placed at a fair position to formulate strategies on whether or not to introduce new products. The main goal of making these decisions on whether to introduce the new product is brought about through the time value of money.
Effective capital decisions require that the invested financial resources translate to future returns. Statement of cash flows is a form of a financial statement which depict both the outflows and inflows of cash during a firms operation. When it is perceived that the amount of money spent exceeds the amount received it becomes challenging to making fair capital budgeting decisions. It should also be noted that there is a direct relationship between capital budgeting decisions and income taxes, inflation and investment decisions (Swan, 2008).
On the other hand, capital modeling refers to the pre-drafting illustration established before making relevant financial decisions altogether. It is therefore forms the initial stage of capital budgeting and is mostly illustrated in a mathematical typical format which is established to depict the performance of a firms financial asset, project or specific forms of investment decision made by the financial personnel altogether.