Capital Budgeting Decisions : Assignment

Added on -2020-02-19

Capital Budgeting pdf is a process of evaluating investments and huge expenses. "capital budgeting decisions" making- A company should not keep the funds idle, it should invest them in a proper place where it is safe and also helps in earning a good return. Risk evaluation- Making any type of investment whether long term or short term involves different types of risk. the two most important are the net present values and IRR method which has been explained with examples below. we also see "Report on Capital Budgeting Techniques".

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CAPITAL BUDGETING
CAPITAL BUDGETING-The power of decision making lies in the hand of the management. Any decision whether related to a petty thing or a major thing has its own significance. The management of the company is held responsible for the wrong decisions as it has a direct impact on the performance of the company. Apart from the financial performance it may also harm the reputation of the company making it difficult to survive in the long run. There are huge number of alternatives available for a set of actions but is is important for the company to choose the best action in order to get the best result.Decisions are to be taken at every level of the organisation i.e. at the top level and even at the bottom level. Decision making is considered a very complex task but it is equally important to bring into action the decision taken by the management. The decision taken by the management can be implemented only when there is a cordial relation between the employees of the company. In order to take decisions relating to the financial planning of the company, the capital budgeting is adopted by the management.Capital budgeting is a wide term which helps in evaluating the expenditures and investment of the company that are huge in amount. The example that can be used to explain expenditureand investment are manufacturing a new plant and machinery or investing funds in some kindof long term instrument. This techniques takes into consideration the cash outflow at present along with the future cash inflows and to check whether the company would be able to earn the required rate of return. This can be also known as the investment appraisal method.There is a huge importance of Capital budgeting. Few of them are-Risk evaluation- Making any type of investment whether long term or short term involve different types of risk, so before investing the funds the risk should be identified and evaluated which can be done through capital budgeting.Decision making- A company should not keep the funds idle, it should invest it in a proper place where it is safe and also helps in earning a good return. However, the funds available with the company are limited and hence it should be invested intelligently after proper analysis. Capital budgeting helps to take decision whether it is prudent to invest at that place or not.Long existence- A company can exist in the longrun when the company is able to control cost and maximise its profits. A proper analysis and planning is required by the company in order to let the company exist in the long run.The limitations of capital budgeting are-Markets are dynamic so there is a possibility that the decision of investment may sometimes be wrong which may affect the budget and the capital of the company.A decision that is taken may earn huge interest but there is also a chance of the investment defaulting.
Decision through capital budgeting is taken for long term. However, if short term decisions are taken through capital budgeting it my have negative impacts on the company.As we said that Capital budgeting is a wide term there are various methods that are involved in it. Few of them are Discounted cash flows analysis, Net present value, Internal rate of return and discounted payback period. However, the two most important are the net present values and IRR method which has been explained with examples below:1.NPV- Net present value is calculated by deducting the amount of cash outflows from the amount of cash inflows. It is easier to understand through this formula that this method is used in capital budgeting to know if there will be profits or not and if there are profits then how much. A positive NPV is considered favourable whereas the negative cash flows is considered unfavourable.2. IRR- The internal rate of return is used to determine whether the investment in which the company is thinking of investing is attractive enough or not. The case whenthe net present values of all the cash flows is zero, then the interest rate is known as IRR. It is favourable when the IRR is greater to the required rate of return and it is considered unfavourable when the IRR is less when compared to the required rate of return.3.The following example will help us to understand the concept of IRR and NPV in a better way. The cash flows of the two project are shown below:NPV of Project AYearCash FlowPresent Value of Cash Flows0-90000 -90,000 12500022,321 22400019,133 32600018,506 42700017,159 YearAB0-90000-900001250000224000032600004270007500053000080000

Capital Budgeting - Introduction, Techniques, Process

The conclusion of the report capital budgeting decisions here taken is capital budgeting with an example that can be used to explain expenditure and investment are manufacturing a new plant and machinery or investing funds in some kind of long term instrument. These techniques take into consideration the cash outflow at present along with the future cash inflows and check whether the company would be able to earn the required rate of return. This can be also known as the investment appraisal method. There is a huge importance of Capital budgeting. A few of them are- Risk evaluation- Making any type of investment whether long term or short term involves different types of risk, so before investing the funds the risk should be identified and evaluated which can be done through capital budgeting.

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