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Capital budgeting

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Capital budgeting

  1. 1. Capital Budgeting
  2. 2. Meaning “Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the goal of shareholders wealth maximization. It is budget for major capital, or investment, expenditures”.
  3. 3. Features Potentially large anticipated benefits A relatively high degree of risk A relatively long time period between the initial outlay and anticipated returns
  4. 4. Types of capital budgeting decision New machinery, new plants, new products, Replacement Expansion Diversification and Research development projects
  5. 5. Classification of investment Mutually exclusive Independent investment
  6. 6. Process of capital budgeting Project Generation Project Evaluation Project Selection Project Execution Follow-up
  7. 7. Significance of capital budgeting Long term Implication Large amount of funds Most critical and difficult decision It is not Reversible
  8. 8. Capital Budgeting Techniques Payback Period Expected number of years required to recover a project’s cost.Payback period = E + B CWhere:E = No. of years immediately preceding the year of recoveryB = Balance amount of investments to be recoveredC = Saving during the year of final recovery
  9. 9. Cont…… Limitations of Payback: Ignores the time value of money. This weakness is eliminated with the discounted payback method. Ignores cash flows occurring after the payback period
  10. 10. Cont…….. Average Rate of return Net present value Internal Rate of Return
  11. 11. Thank you

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