Similarities between firm's capital budgeting decisions and individual investment decision?

Answer 1

Capital budgeting is very necessary for a proper management. The manager is the one to select the best form and type of investment. And to do this a sound procedure well planing and evaluation is needed. This process is known as capital budgeting. Or in some simple words capital budgeting is the process of recording additions to the assets.

Capital budgeting process is very much same as those of individual investment decisions as they both involve these same steps:-

• They calculate the risk involved in the cash flows.
• They also in favor find the rate of return
• Estimation of the cash flow that is, the rate of interests and dividends as involved in the case of shares, debentures or bonds and proper optimization of cash flow is common in both of the sides.
• They both consider if the Present value of the inflows is greater than the present value of the outflows which means that net present value should be positive.
• Calculated rate of return is also to be considered that if it is higher than the total project cost of the capital.
• Determination of appropriate discount rate which is based on the level of the risk in the project and the interest rate is also common in both case.

Several Capital budgeting techniques are also very much similar to those of the individual investment decisions as shown in the above points. Capital budgeting decisions and individual investment decisions are same in many ways and their way of interpretation is somewhat identical as shown above.

Answer 2

BOTH ARE WORKING SERVE PEOPLE.