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Capital budgeting

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The ppt includes the basics of capital budgeting; thereby providing an overview of it

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Capital budgeting

  1. 1. CAPITAL BUDGETING MADE BY: GAYATRI IYER
  2. 2. CAPITAL BUDGETING  Capital Budgeting is the process of long range planning involving investment of funds in long term activities whose benefits are expected over a series of years.  It is a continuous process and is carried out by different functional areas of management such as production, marketing, etc.
  3. 3. CAPITAL BUDGETING DECISIONS Examples of capital budgeting decisions:  Decisions related to setting up of factories  Decisions related to installing a machinery  Decisions relating to creating additional capacity to manufacture a part which at present is purchased from outside.
  4. 4. WHY ARE THESE DECISIONS IMPORTANT ?  Affects long term growth: These decisions affect the rate and direction of long term growth of the enterprise.  Involves large amount of funds: These decisions are planned after careful evaluation of various projects.  Involves high risk and uncertainty: These decisions involve risk and uncertainty associated with the future cash flow of the project. The rate of earning may fluctuate and the firm may become more risky.
  5. 5. Continued…  Irreversible decision by nature: These decisions once taken are not easily reversible without incurring heavy losses. The firm will incur heavy losses if long term assets are scrapped on reversing the investment decisions.
  6. 6. TYPES OF CAPITAL BUDGETING DECISIONS COST REDUCTION DECISIONS REPLACEMENT DECISIONS MODERNISATION DECISIONS
  7. 7. COST REDUCTION DECISIONS  Replacement decisions- Replacing a fixed asset due to the expiry of the economic life of asset is called replacement decision.  Modernisation decision- Replacing a fixed asset due to technological obsolescence is known as modernisation decision.
  8. 8. TYPES OF CAPITAL BUDGETING DECISIONS REVENUE EXPANSION DECISIONS EXPANSION DECISONS DIVERSIFICATION DECISIONS
  9. 9. REVENUE EXPANSION DECISIONS  Expansion Decisions: Increasing the production capacity to avoid shortage or delay in the delivery of products or services. E.g. Increasing oil refining capacity from 1000 to 2000 tonnes.  Diversification Decisions: Commencing a new product line to capture the new investment opportunities and increase revenues. E.g. ITC Ltd.
  10. 10. TYPES OF CAPITAL BUDGETING DECISIONS OTHER DECISIONS MUTUALLY EXCLUSIVE DECISIONS ACCEPT REJECT DECISIONS
  11. 11. OTHER DECISIONS  Mutually Exclusive Decisions: The decisions are said to be mutually exclusive if two or more alternative proposals are such that the acceptance of one proposal will lead to the rejection of another.  Accept reject decisions: These decisions do not compete with each other and one or more proposals which meet the decision criterion of the firm can be accepted.
  12. 12. THANK YOU

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