capital Budgeting
Capital is nothing but financial assets or financial value
The capital budgeting method is logical and scientific analysising the prosses then finalize the best Bussiness proposal
The analysising process is very effective and strong foundation creating in business point view
The capital budgeting motive is creating value or increaseing the value
Example- investing land, machinery, building, skilled labour etc...
Capital Budgeting is a one type of long tern investment process, this investment is your capital investment,Is to invest on top of the fixed assets or new project analysis a fundamental in projects
Example : buying new machine and start a new project
New project starteing means,before just analysis it I.e. How to grow the project. How in Cash flow and how get cash flow then how much profit in per Annum. To explore whether
Identify investment opportunity, generating a new idea or new project for We need to think and invest in a project that will be more profitable in the future. development project.
It's one type of capital budgeting process.
Gather informational data and financial information and analyze the plan for collecting information that will assess future cash flow and the profitability of individuals. Select that type of projects
Decide which investment is a good business venture and select and operate good profitable plans such as improving returns or maximizing profits.
Prepare the necessary funds for the investment
Example; The profit that can come from the company can be used as an investment
It is two different ways to analyze capital expenitures
One is traditional/Discounted method and another one is moreden/Discounted cash flow p method
Subdinotes for traditional method
* payback period
the playback method is safe anmd sequer business method in the capital budgeting ,
the Play back methods time depended revenue methods because inistial investment amount or cost recovery coverd in some particular time period or one year recovery the capital investment with in the project
Playback period=cash outlay \ Annual cause in flow
* Account Rate of Return (ARR)
ARR= Annual average net earnings
___________________________ ×100
Average investment
Average investment = (original investment-scrap value)+additional net working capital+ scrap value
Uesing this formula selecting high' return project
Sub denotes moreden/Discounted cash flow p method
*Net present value (NVP)
NVP = present value of cash in flows- initial investment
* Recognition of time value of money
* Sound method of appraisal
*Maximization of shareholders wealth
*internal rate of return
IRR= lower rate+
( present value at lower rate - Out cash flow)
---------------------------------------------×Differ in Rate
Present value at lower rate- present value of high rate
* profitability Index
Present value of cash inflow
Profitable Index = ________________________
Present value of cash outflow
Capital budgeting process
* Investment screening proposal
*Capital budgeting proposal
*Budgeting approval and authorisation
*Project tracking
* Post completion audit
* Availability of funds
* future involved
*Urgency
*Research and development (R&D) projects
*Obsolescence
*Competitors Activity
*Integral factors
*Compliance with statutory provision
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