Capital Budgeting

Modern finance manager function is efficient

allocation of capital among available
investments.

Fixed Assets
Fixed asset are those asset which are
permanent in nature and used by firm in
normal operations.
Fixed assets are of two types.

Capital budgeting
Capital budgeting is defined as the firms
decision to invest in current funds more
efficiently in long term asset in anticipation of
expected flow of benefits over the series of
years.
CB is the process of identifying, analyzing
and selecting investment proposals whose
returns(cash flows) are expected beyond one
year.

Importance of Capital budgeting

Growth
More Risky
Huge investment
Irreversibility
Effect on other projects.
Difficult decisions.

Limitations/ Difficulties Capital budgeting

Measurement Problem
Uncertainty
Temporal spread.

Classification of Projects
New Projects
Expansion Projects
Diversification Projects
Replacement or modernization Projects
R/ D Projects
Miscellaneous Projects

Capital budgeting can also be classified in

following ways
Accept- Reject Decision
Mutually exclusive investments
Capital rationing decision
Contingent investments

Techniques of evaluation of Capital budgeting

Project evaluation
techniques

Traditional or non
discounted cash
flow

Pay back
period

ARR

Discounted cash
flow

Net
Present
value

Profitabilit
y Index

Internal
rate of
return

Performa of Cash flow after Tax

Sales
Less variable cost
Contribution
Less fixed cost
Earning before deprecation and taxes (EBDT)
Less depreciation
Earning before tax
Less tax
Earning after tax
Add Depreciation
Cash flow after tax CFAT

Capital budgeting
PBP