Capital budgeting decisions

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Capital budgeting decisions

  1. 1. By: VIKRAM.G.B Lecturer, P.G Dept. of CommerceVivekananda Degree College, B’lore-55
  2. 2.  The Investment Decisions are generally known as Capital Budgeting Decisions or Capital Expenditure Decisions. It can be defined as the firm’s decision to invest its current funds most efficiently in the long- term assets in application of an expected flow of benefits over a series of years.
  3. 3.  Expansion, acquisition, modernization and replacement of long-term assets. Sale of a division or business. Change in the methods of sales distribution. Change in the methods of advertising campaign. Change in the methods of Research and development program.
  4. 4.  The exchange of current funds for future benefits. The funds are invested in long-term assets. The future benefits will occur to the firm over a series of years.
  5. 5.  1st Classification  Expansion of existing business.  Expansion of new business.  Replacement and modernization. 2nd Classification  Mutually exclusive investments.  Independent investments.  Contingent investments.
  6. 6. Search for Investment Opportunities. Screening the Alternatives. Analysis of Feasible Alternatives. Evaluation of Alternatives. Authorization. Implementation & Control.
  7. 7.  Estimation of cash flows. Estimation of the required rate of return. Application of a decision rule for making the choice.  Considering all cash flows to determine true profitability.  Separating good projects from bad projects.  Ranking projects based on their true profitability.  Recognizing Cash flows on several basis.  Choosing among mutual exclusive projects which maximizes S.H wealth.
  8. 8.  Non-discounted Cash Flow Criteria:  Payback Period (PBP).  Discounted Payback period (DPBP).  Accounting Rate of Return (ARR). Discounted Cash Flows Criteria:  Net present value (NPV).  Internal Rate of Return (IRR).  Profitability Index (PI).

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