logo

Capital Budgeting Techniques

12 Pages2511 Words347 Views
   

Added on  2019-10-30

About This Document

The techniques through which the capital budgeting could be done include the following: Payback Period Discounted Payback Period Net Present Value Accounting Rate of Return Internal Rate of Return Profitability Index All of these above stated techniques are based upon the comparison of the cash inflows and the cash outflows that are related with each one of the project but follows different approaches when being applied.

Capital Budgeting Techniques

   Added on 2019-10-30

ShareRelated Documents
CAPITAL BUDGETING TECHNIQUES1CAPITAL BUDGETINGTECHNIQUES
Capital Budgeting Techniques_1
CAPITAL BUDGETING TECHNIQUES2ContentsIntroduction:...............................................................................................................................3Techniques:................................................................................................................................3Break even analysis:........................................................................................................4Scenario analysis:............................................................................................................5Sensitivity analysis:.........................................................................................................6Monte Carlo simulation:.................................................................................................7References..................................................................................................................................8
Capital Budgeting Techniques_2
CAPITAL BUDGETING TECHNIQUES3Introduction:The process of capital budgeting is one of the most important processes that are used by themanagement of the company. This process is used for budgeting of the financial assets. Thefinancial process is used for the determination of the different projects that include a capitaloutlay for the company. This includes the building of a building or a piece of equipment orbuying it. There are the assets that any company invests in and hence, are of an utmostimportance for the company (the balance, 2017).Also, then there are independent and mutually exclusive capital investment projects in whichthe company makes an investment in. these are the projects that are of an utmost importanceand the decision with regard to this is made by the business owner since it includes anincreased amount of money. If this decision is not taken wisely, then that could lead thecompany to incur a huge amount of loss. There are many factors that have to be consideredwhen making a capital investment decision. The rate of return on each one of the project hasto be compared and the same would be kept in as against the weighted average cost of capitalof the company which is as such not as simple as it sounds. The management of the companyhas to go through a number of different financial analysis so as to derive at the correctanalysis. Also, the business would always want to estimate in the cash flows that wouldgenerated for the company due to the project. The hardest part of the cash flow is theestimates which tries in to determine in the rate of return of the project. There are many of thecash flow forecasting techniques that would help the company in choosing the projects(Radiomariamiami, 2017).
Capital Budgeting Techniques_3
CAPITAL BUDGETING TECHNIQUES4Techniques:The process of capital budgeting is the method through which the investments that are of alonger duration are assessed and the various investments on the purchase or the replacementof the property, plant and equipment along with new line of the product and the other projectswould be assessed. The techniques through which capital budgeting could be done includethe following:1.Payback Period2.Discounted Payback Period3.Net Present Value4.Accounting Rate of Return5.Internal Rate of Return6.Profitability IndexAll of these above stated techniques are based upon the comparison of the cash inflows andthe cash outflows that are related with each one of the project but follows differentapproaches when being applied.The following a very brie outline of each one of the technique which is used:Payback period which helps in the measurement of the time which the initial flow ofthe cash is returned in by the project. These cash flows are not discounted and a lowerpayback period is always preferred.Net present value which equals to the difference between the net cash outflow and thenet cash inflow. The project with the higher net present value and the investment isselected only if the net present value is positive.The accounting rate of return of the project is the profitability of the project which isdiscounted using the projected total amount of the net income which is divided by the
Capital Budgeting Techniques_4

End of preview

Want to access all the pages? Upload your documents or become a member.

Related Documents
Capital Budgeting- Doc
|25
|4860
|298

Financial Analysis and Management: Techniques of Investment Appraisal Process
|19
|4613
|428

Capital Budgeting Assignment Sample
|7
|1180
|308

Corporate Finance : Assignment Sample
|5
|690
|15

Financial Management: Payback Period, Discounted Cash Flow, Accounting Rate of Return, Net Present Value, Internal Rate of Return
|14
|3721
|345

Corporate Financial Management Assignment Capital Budgeting
|12
|3009
|181