Period Planning

While discussing the compiling of the demand schedule, it was said, inter "for the forthcoming period". Since several projects may extend through several periods (years, or quarters, as the case may be), it is evident that funds have to be appropriated to projects through several periods. Since the exercise is a multi-period problem in general, the term capital budgeting is equally in vogue as the truly significant and purposeful term capital rationing. The annual budget, for example, cannot lose sight of, and hence, cannot be set up completely independent from, future needs and future supplies. Hence, planning for demands (including for capital equipment requirements) and supplies is done successively for long-term (say 5 to 10 years hence), medium-term (say2 to 3 years hence) and short-term (generally, the next year in the horizon). Long-term planning must address the question of the optimal capital mix (debt, retained or flow back earnings, and new equity floated) so that the overall cost of capital is minimised. 

For this reason, based on the long-term planning, cost of capital is necessarily (to be) a multi-period value and should not be based on a narrow view with disregard to needs and possible supplies (for funds) in future years.