Capital budgeting is the process of evaluating large investments and expenses to obtain the best returns. The objectives are to select profitable projects, control capital expenditures, and find the right funding sources. The process involves identifying opportunities, evaluating proposals, choosing profitable investments, allocating capital, and reviewing performance. Common techniques used are payback period, net present value, accounting rate of return, internal rate of return, and profitability index. Making the right capital budgeting decisions is important for a business's success as wrong choices can negatively impact funds and long-term projects.

1. Capital Budgeting
J KRISHNA SINDHU
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2. Capital Budgeting
Capital Budgeting is a process of evaluating investments
and huge expenses in order to obtain the best returns on
investment

3. Objectives Of Capital Budgeting
1. Selecting profitable projects
● Capital restriction
● Increase its shareholders’ wealth.
2. Capital expenditure control
● Forecasting capital expenditure requirements
● no investment opportunities are lost is the crux of budgeting.
3. Finding the right sources for funds
● balance between the cost of borrowing and returns on investment

4. Capital Budgeting Process
1. Identifying investment opportunities
● reasons for taking up investments in a business.
2. Evaluating investment proposals
● match the objective of the firm to maximize its market value.
● estimation of the benefits and the costs needs to be done
3. Choosing a profitable investment
● capital rationing to rank the projects as per returns
● most profitable investment and select it
4. Capital Budgeting and Apportionment
● reserves, investments, loans or any other available channel
5. Performance Review

5. Capital Budgeting Techniques
1. Payback period method : In this technique, the entity calculates the time period required to earn the initial
investment of the project or investment.
2. Net Present value : The net present value is calculated by taking the difference between the present value of
cash inflows and the present value of cash outflows over a period of time.
3. Accounting Rate of Return : In this technique, the total net income of the investment is divided by the initial
or average investment to derive at the most profitable investment.
4. Internal Rate of Return (IRR) : For NPV computation a discount rate is used. IRR is the rate at which the
NPV becomes zero.
5. Profitability Index : Profitability Index is the ratio of the present value of future cash flows of the project to
the initial investment required for the project.

6. Conclusion
Capital budgeting is a predominant function of management. Right
decisions taken can lead the business to great heights. However, a
single wrong decision can inch the business closer to shut down due
to the number of funds involved and the tenure of these projects.

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