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. Features
Potentially large anticipated benefits
A relatively high degree of risk
A relatively long time period between the
initial outlay and anticipated returns
4. Types of capital budgeting decision
New machinery, new plants, new products,
Replacement
Expansion
Diversification and
Research development projects
6. Process of capital budgeting
Project Generation
Project Evaluation
Project Selection
Project Execution
Follow-up
7. Significance of capital budgeting
Long term Implication
Large amount of funds
Most critical and difficult decision
It is not Reversible
8. Capital Budgeting Techniques
Payback Period
Expected number of years required to recover a project’s
cost.
Payback period = E + B
C
Where:
E = No. of years immediately preceding the year of recovery
B = Balance amount of investments to be recovered
C = Saving during the year of final recovery
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. Cont……..
Average Rate of return
Net present value
Internal Rate of Return