Question

What are some examples of capital budgeting 300 words

Answer 1

Capital Budgeting is one of the tools of taking financial decisions about investing funds in business projects by choosing the investment option which generates hightest

returns on the invested amount. The organisation does by using several techniques which help an organisatin to compare investment in a project with exptected

inflows and choosing the one which is most beneficial. However capital budgeting techniques takes into consideration only the financial factors to take investment decision

Few of the techniques used by organisations to make capital budgeting decision are -

1. Payback Period Method -

In Payback period method, the organsation calculates the amount of time that will be needed to recover the amount invested in the project and chooses the project which

allows the firm to recover the investment in minimum possible time. Here company uses the actual outflow and inflow in the project and does not take into the account

the time value of money.

2. Discounted payback period method -

This method is similar to the Payback period method discussed above, except that the cash flows are discounted to net present value using the appropriate discount factor

like weighted average cost of capital or some other market rate and then payback period is calculated. This is more refined version of payback period method and is more

appropriate

3 Accounting Rate of Return -

In Accounting Rate of Retun method, the company calculated the annualised rate of retun implied by the inflows and outflows over the life of the project

and chooses that project which allows a firm to get maximum rate of return on amount invested

4. Net Present Value

In Net Present Value method, the company first determines the absolute outflows and inflows of the project for each year and then discounts those cashflows using

appropriate discount rate like WACC. Present value of outflows is deducted from present value of inflows to calculate net present value of the project over its life/

A project or an investment which gives hightes Net Present Value is choosen.