Capital Budgeting Techniques by azharswati

1. Presentation No.02
Presented To Prof. Liaquat Aziz
Presented By: Muqaddas Zahoor
Roll No 18
Class BBA Hon’s 5th
Department of Management Science Gov,t Postgraduate
College (Boys) Mzd Affiliated With UAJK

2. Capital Budgeting
Capital budgeting is the process of planning and evaluating significant investments in
long-term assets or projects. These investments typically involve substantial amounts
of money and have long-lasting effects on a company’s operations and profitability.
The capital budgeting process involves several key steps:
Identification of Investment Opportunities: The process begins with identifying
potential investment opportunities that align with the company’s strategic objectives
and growth plans. This may involve projects such as acquiring new equipment,
expanding facilities, launching new products, or entering new markets.

3. Capital Budgeting Process
Estimation of Cash Flows: Once investment opportunities are identified, the next step is
to estimate the cash flows associated with each project over its expected lifespan. This
involves forecasting both the initial investment outlay and the future cash inflows and
outflows generated by the project. Cash flows should be projected over the project’s entire
life to capture all relevant costs and benefits.
Selection of Evaluation Techniques: Choose appropriate evaluation techniques to
analyze and compare investment alternatives. Common capital budgeting techniques
include:

4. Asset Replacement
Asset replacement and asset expansion are two distinct strategies that companies use to manage their
capital investments and optimize their asset base. Let’s delve into each strategy:
Asset Replacement:
Asset replacement involves replacing existing assets with new ones to maintain or enhance operational
efficiency, productivity, or competitiveness. This strategy is typically employed when existing assets
become outdated, inefficient, or unreliable, or when technological advancements offer opportunities for
improvement.
Assessment of Risk: Evaluate the risks associated with each investment opportunity. Consider factors
such as market risk, technological risk, regulatory risk, and operational risk. Assessing risk helps in
determining the uncertainty surrounding cash flow projections and allows for risk-adjusted decision-
making.

5. Asset Expansion
Asset Expansion:
Asset expansion involves acquiring additional assets or capacity to support business growth, expansion
into new markets, or the introduction of new products or services. This strategy aims to increase revenue,
market share, or profitability by investing in new assets or expanding existing ones.
Key characteristics of asset expansion:
Business Growth: Asset expansion supports business growth by increasing production capacity,
expanding into new geographic markets, or diversifying product offerings.
Implementation and Monitoring: Once investment decisions are made, implement the selected projects
and allocate resources accordingly. Establish monitoring mechanisms to track project progress, assess
performance against initial projections, and make any necessary adjustments to ensure that investments
deliver the expected returns.

6. Asset Expansion
Post-Implementation Review: Conduct post-implementation reviews to evaluate the actual
performance of completed projects compared to initial projections. Identify lessons learned, successes,
and areas for improvement to inform future capital budgeting decisions and refine the investment
evaluation process.
By following these steps, companies can effectively allocate capital to investment opportunities that
enhance long-term value creation, support strategic objectives, and drive sustainable growth.
Capital Budgeting Techniques
Capital budgeting techniques are analytical tools used by companies to evaluate and prioritize potential
investment projects or capital expenditures. These techniques help companies make informed decisions
about allocating scarce resources to projects that offer the highest returns and align with strategic
objectives. Here are some common capital budgeting techniques:

7. Capital Budgeting Techniques
Capital budgeting techniques are analytical tools used by companies to evaluate and prioritize potential
investment projects or capital expenditures. These techniques help companies make informed decisions about
allocating scarce resources to projects that offer the highest returns and align with strategic objectives. Here are
some common capital budgeting techniques:
Net Present Value (NPV):
NPV calculates the present value of all expected future cash flows generated by an investment, discounted at a
predetermined rate (typically the company’s cost of capital).
If the NPV is positive, the project is expected to generate value and increase shareholder wealth.
Decision Rule: Accept projects with positive NPV; reject projects with negative NPV.

8. Capital Budgeting Techniques
Internal Rate of Return (IRR):
IRR is the discount rate that makes the net present
value of cash flows equal to zero.
It represents the rate of return generated by the
investment.
Decision Rule: Accept projects with IRR higher than
the company’s cost of capital; reject projects with IRR
lower than the cost of capital.
Payback Period:
Payback period measures the time it takes for a project
to recoup its initial investment.
It’s a simple and intuitive measure of project liquidity
and risk.
Decision Rule: Accept projects with shorter payback
periods, as they recover investment sooner.