Question

Once a company obtains capital, it needs to decide how it will best be used. Investments and projects are reviewed and analyzed to determine the best use of capital. Examine methods of analyzing project choices: Describe the term capital budgeting Identify and define three common techniques for analyzing projects

Answer 1

Having capital is not enough for the success of a firm. It must be able to invest the capital in correct way inorder to gain profits. The analysis and planning of the investment that must be made and the long term impacts the projects or the new machinery or new investments will have on the business is known as capital budgeting. This is used for effective utilisation of the capital available.

Inorder to choose correct project to be invested in, certain methods can be used. One such method is evaluating the financial requirements of the project. We can examine the total investment required for that project and compare it with the other options available. We also need to estimate the total returns we can get and the profits we get. After comparing these results we can choose the best project.

We can also analyse a project depending onthe time taken to complete it. The project which takes less time and gives more efficient results must be chosen after comparing all the projects in terms of time taken.

Another method for analysing a project is the risks associated with the project. It is better to invest in projects with less risks and that are more clear . When we know that we need to face risks in any project , the project with less number of risks must be chosen .