What is Capital budgeting is primary concerned with?

Answer 1

Management of fixed capital, capital budgeting decision or investment decision is the process of long range planning involving investment of funds in various long term activities whose benefit are expected over a series of year .

Need of Capital budgeting Decision

• these decisions affects the long term growth & survival of business,
• these decision have long term implication for the enterprises because the effect of investment decision extend in to the future
• these decision involve large investment in various long term asset , thus planned after careful evaluation of various project
• involve risk & uncertainty associated with the future cash flow of the project,since the actual cash flow may not match expected cash flow the rate of earning may fluctuate & he firm may become more risky
• decision once taken cannot be easily reversible without incurring heavy losses , these decisions are very important for any organization

Steps in capital Budgeting :

• project planning
• project evaluation
• project selection
• project implementation
• project control
• project review

Capital Budgeting Techniques for Analysis of projects :

A . Discounting technique (use time value of money ) Methods :

1. Net present value
2. profitability index
3. Internal Rate of return
4. Modified internal rate of return
5. Discounted payback period
6. Net present value index

B . Non- Discounting Technique (ignores time value of money ) Methods :

1. Payback period
2. Accounting rate of return or average rate of return