#capital budjet

1. Capital Budgeting Techinuqes
 Use to analyze whether to accept or to reject the
project.
 Process in which business determines and evaluates
investments that are large in nature

2. Techniques
 Payback Period
 NPV
 IRR

3. Length of time required to recover cost of an investment.
Used to evaluate proposed investments.
Formula for annuity case.

4. Decision Criteria
 If payback period is less than maximum acceptable
payback,project is accepted.
 If it is more than maximum payback period,it is
rejected.

5. Net Present Value(NPV)
 Minimum return that must be earned on project.
 Present value of all cashflows equals to O.
 Formula:Present value of cashflows-initial investment.

6. Decision Criteria for NPV
 If NPV is greater than O,accept the project.
 If smaller than O,project rejected

7. Internal Rate of Return
 It equates NPV of investement opportunity with O.
 Widely used technique.

8. Criteria
 If the IRR is greater than cost of Capital,accept the
project.
 If it is less,reeject it ASAP.

9. Which Approach is better
 In theoretical view,NPV is more better approach.
 In Practical view,IRR is better