USED IN ORGANIZATIONS

CONCEPT
It is the process of evaluating and

selecting long term investments that are consistent with the goal of share holders wealth maximisation

CAPITAL EXPENDITURE
Is an outlay of funds that is expected to

produce benefits over a period of time exceeding one year

DECISIONS IN CAPITAL BUDGETING PROCESS

Accept-Reject Decisions
Mutually exclusive project Decisions Capital rationing Decisions

DIFFICULTIES IN CAPITAL EXPENDITURE DECISIONS

Benefits from long term investments

are received in some future period which is uncertain Therefore an element of risk is involved in forecasting future sales revenue as well as associated cost of production and sales

DATA REQUIREMENT
After tax cash outflows
Cash inflows

DIFFERENCE
ACCOUNTING PROFIT CASH FLOW Treatment of Depreciation in depreciation cost computation As a source of cash to the extent of tax advantage

INVESTMENT IN NEW CAPITAL PROJECTS

A Single proposal-cash outflows consists of

installation costs A Replacement proposal-the sale proceeds from existing machine reduce the cash outflows required to purchase the new machine Mutually exclusive proposals-the selection of one proposal precludes the selection of others

EVALUATION TECHNIQUES
Accounting rate of return
Pay back period Discounted cash flow Net present value Internal rate of return Profitability

CALCULATION-ARR METHOD
The average rate of return is calculated

-by dividing average profit after tax by average investments -Average investment=1/2(Initial cost of machine-salvage value)+Salvage value +networking capital -Annual average profit after tax=Total expected after tax profit/Number of years

PAY BACK METHOD

It measures the number of years

required for the CFAT to pay back the initial capital investment outlay ignoring interest payment

DISCOUNTED CASH FLOW

Satisfy all the attributes of a good

measure of appraisal as they consider the total benefits as well as the timing of benefits

NET PRESENT VALUE

Summation of present value of

operating CFAT in each year salvage value and working capital in the terminal year the summation of present value of cash outflows(CO) in each year

CONCLUSION
Capital budgeting techniques is used

in organizations for preference of projects whether rejected or accepted