Understanding Budgeting and Capital Decisions

This management accounting assignment explores the nature of budgeting, its uses and limitations. It then delves into capital decision-making by analyzing the comparative advantages and disadvantages of Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period methods. The assignment provides a comprehensive understanding of these concepts crucial for effective financial planning and investment evaluation.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
CONCLUSION................................................................................................................................1
REFERENCES................................................................................................................................2

INTRODUCTION
TASK 1
Nature of budgeting with its use and limitations
Budgeting is replicated as process of creating a specific plan for spending money. In the
present scenario, this spending plan is known as budget. Generally, it is prepared on prior basis
on different future plans of actions. It is directly related to particular definite future duration on
basis of objectives which must be accomplished. Usually it is expressed in financial aspect and
reflects planned income to be produced. The probable expenditure has been shown which is
going to be incurred and employed capital is indicated.
Uses:
 It gives en-surety about availability of enough cash with requirement of capital
expenditure and revenue.
 It helps in tracking expenses as budgeting allows for observing facts and to take financial
decisions.
 Budgeting helps to set limits on spending which will help to be accountable for various
financial decisions.
 It helps in building wealth.
Limitations:
 It leads to inaccuracy as it is based on numerous assumptions for estimating revenues and
expenses.
 It consumes too much time and expensive as well.
 The budgeted amounts are considered by each department with less flexibility and
finishes budgeting exercise.
 It might lead to conflicts when particular department is not capable for meeting budgeted
targets.
TASK 3
B Identifying and discussing comparative advantages and disadvantages of NPV, IRR and
Payback
Net present value
Advantages
 It provides importance to time factor.
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 It helps in maximising value of firm.
 While calculating NPV, both after and before cash flow is over life span of project.
Disadvantages
 It is difficult to use.
 It is difficult for calculating the proper discount rate.
 It does not provide accurate decision when investment is mutually exclusive projects.
Internal rate of return
Advantages
 There is consideration of profitability over whole economic life of project.
 Time value of money is considered along with annual cash inflow.
 It provides huge reliability on objective for increasing shareholder's wealth.
Disadvantages
 It has presence of tedious calculations.
 It has assumptions that earnings are directly reinvested at IRR for remaining life of
project.
 Outcome of NPV and IRR might differ during evaluation
Payback period
Advantages
 It has requirement of less cost, labour and time as compared to capital budgeting.
 It provides importance to fast recovery of investment related to capital assets.
 Its suitability is higher to company which has presence of short amount of cash in hand
and organization with weak liquidity position.
Disadvantages
 This method avoids short term liquidity and solvency of business concern.
 Capital wastage and economic life is avoided through restricting consideration of gross
earning of project.
 It does not consider time value of money and it might directly lead to mislead various
capital budgeting decisions.
 It treats every asset on individual aspect through its isolation from other asset, but it is not
feasible.
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REFERENCES
Books and Journals
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