## Capital Expenditure Budget
The capital expenditure budget is the planned outlay on fixed assets — land, building, plant, machinery — along with capital receipts such as loans and share issues.
### Basis for Preparation
1. Development plans — expansion of plant to increase output capacity.
2. Replacement requests from operating departments.
3. Market absorption factors — can sales potential absorb the increased output? What are the advertising costs required?
4. Plant utilisation indicators — overhead on production facilities as shown by the plant utilisation budget.
### Merits of Capital Budgeting
| Merit | Explanation |
|---|---|
| Development programme | Outlines company's capital plans and estimated expenditure |
| System of priorities | Allocates limited funds to highest-priority projects |
| Expenditure control | Acts as a spending control tool |
| Return estimation | Helps calculate return on capital employed |
| Cash budget completion | Ensures funds exist for all obligations including capital commitments |
| Cost reduction | Supports modernisation and renovation to cut future costs |