Capital budgeting decison

In other words, capital budgeting decision is concerned with the long-term investment decision i. Using the time value of money, we calculate the discounted cash flows at a predetermined discount rate.

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The investment in these projects are quite heavy and to be made immediately, but the returns will be available only after a period of time. The process is also known as investment appraisal. All those proposals which give higher return than a certain desired rate of return are accepted and the rest are rejected.

There exist linear programming techniques that can be used when faced with a capital rationing constraint; they are, however, beyond the scope of this text. Learning Objectives Explain Payback Period.

Payback period The amount of time until our initial investment is recovered. For example, if a company is considering investment in one of the two temperature control systems, acceptance of one system will rule out the acceptance of another.

Therefore, for project A, in order to meet the initial investment, it would take approximately 10 years. Now, there are 2 methods to calculate the payback period based on the cash inflows — which can be even or different.

Learning Objectives Explain the difference between independent and mutually exclusive projects.

Capital budgeting methods

Of course not! Present Value Capital budgeting in financial management develops a strategic plan for business growth. The life of these fixed assets is more than one year. Estimating accounts for inflation with the time factor playing a role. Our tutors can break down a complex Capital Budgeting Decisions problem into its sub parts and explain to you in detail how each step is performed. Should we spend our money or save it? We only need one car, so we will pick only the best one. Capital budgeting techniques are a series of tools to help us determine which projects to undertake. Download