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Page 1
Capital Budgeting
Capital Budgeting
?
Meaning of capital budgeting
Meaning of capital budgeting
?
Significance
Significance
?
Capital budgeting process
Capital budgeting process
?
Investment criteria
Investment criteria
?
Methods of capital budgeting
Methods of capital budgeting
Page 2
Capital Budgeting
Capital Budgeting
?
Meaning of capital budgeting
Meaning of capital budgeting
?
Significance
Significance
?
Capital budgeting process
Capital budgeting process
?
Investment criteria
Investment criteria
?
Methods of capital budgeting
Methods of capital budgeting
Meaning
Meaning
?
The process through which different projects
The process through which different projects
are evaluated is known as capital budgeting
are evaluated is known as capital budgeting
?
Capital budgeting is defined “as the firm’s
Capital budgeting is defined “as the firm’s
formal process for the acquisition and
formal process for the acquisition and
investment of capital. It involves firm’s
investment of capital. It involves firm’s
decisions to invest its current funds for
decisions to invest its current funds for
addition, disposition, modification and
addition, disposition, modification and
replacement of fixed assets”.
replacement of fixed assets”.
?
“
“
Capital budgeting is long term planning for
Capital budgeting is long term planning for
making and financing proposed capital
making and financing proposed capital
outlays”- Charles T Horngreen.
outlays”- Charles T Horngreen.
Page 3
Capital Budgeting
Capital Budgeting
?
Meaning of capital budgeting
Meaning of capital budgeting
?
Significance
Significance
?
Capital budgeting process
Capital budgeting process
?
Investment criteria
Investment criteria
?
Methods of capital budgeting
Methods of capital budgeting
Meaning
Meaning
?
The process through which different projects
The process through which different projects
are evaluated is known as capital budgeting
are evaluated is known as capital budgeting
?
Capital budgeting is defined “as the firm’s
Capital budgeting is defined “as the firm’s
formal process for the acquisition and
formal process for the acquisition and
investment of capital. It involves firm’s
investment of capital. It involves firm’s
decisions to invest its current funds for
decisions to invest its current funds for
addition, disposition, modification and
addition, disposition, modification and
replacement of fixed assets”.
replacement of fixed assets”.
?
“
“
Capital budgeting is long term planning for
Capital budgeting is long term planning for
making and financing proposed capital
making and financing proposed capital
outlays”- Charles T Horngreen.
outlays”- Charles T Horngreen.
?
“
“
Capital budgeting consists in planning
Capital budgeting consists in planning
development of available capital for the
development of available capital for the
purpose of maximising the long term
purpose of maximising the long term
profitability of the concern” – Lynch
profitability of the concern” – Lynch
?
The main features of capital budgeting are
The main features of capital budgeting are
a. potentially large anticipated benefits
a. potentially large anticipated benefits
b. a relatively high degree of risk
b. a relatively high degree of risk
c. relatively long time period between the
c. relatively long time period between the
initial outlay and the anticipated return.
initial outlay and the anticipated return.
- Oster Young
- Oster Young
Page 4
Capital Budgeting
Capital Budgeting
?
Meaning of capital budgeting
Meaning of capital budgeting
?
Significance
Significance
?
Capital budgeting process
Capital budgeting process
?
Investment criteria
Investment criteria
?
Methods of capital budgeting
Methods of capital budgeting
Meaning
Meaning
?
The process through which different projects
The process through which different projects
are evaluated is known as capital budgeting
are evaluated is known as capital budgeting
?
Capital budgeting is defined “as the firm’s
Capital budgeting is defined “as the firm’s
formal process for the acquisition and
formal process for the acquisition and
investment of capital. It involves firm’s
investment of capital. It involves firm’s
decisions to invest its current funds for
decisions to invest its current funds for
addition, disposition, modification and
addition, disposition, modification and
replacement of fixed assets”.
replacement of fixed assets”.
?
“
“
Capital budgeting is long term planning for
Capital budgeting is long term planning for
making and financing proposed capital
making and financing proposed capital
outlays”- Charles T Horngreen.
outlays”- Charles T Horngreen.
?
“
“
Capital budgeting consists in planning
Capital budgeting consists in planning
development of available capital for the
development of available capital for the
purpose of maximising the long term
purpose of maximising the long term
profitability of the concern” – Lynch
profitability of the concern” – Lynch
?
The main features of capital budgeting are
The main features of capital budgeting are
a. potentially large anticipated benefits
a. potentially large anticipated benefits
b. a relatively high degree of risk
b. a relatively high degree of risk
c. relatively long time period between the
c. relatively long time period between the
initial outlay and the anticipated return.
initial outlay and the anticipated return.
- Oster Young
- Oster Young
Significance of capital budgeting
Significance of capital budgeting
?
The success and failure of business mainly
The success and failure of business mainly
depends on how the available resources are
depends on how the available resources are
being utilised.
being utilised.
?
Main tool of financial management
Main tool of financial management
?
All types of capital budgeting decisions are
All types of capital budgeting decisions are
exposed to risk and uncertainty.
exposed to risk and uncertainty.
?
They are irreversible in nature.
They are irreversible in nature.
?
Capital rationing gives sufficient scope for the
Capital rationing gives sufficient scope for the
financial manager to evaluate different proposals
financial manager to evaluate different proposals
and only viable project must be taken up for
and only viable project must be taken up for
investments.
investments.
?
Capital budgeting offers effective control on cost
Capital budgeting offers effective control on cost
of capital expenditure projects.
of capital expenditure projects.
?
It helps the management to avoid over investment
It helps the management to avoid over investment
and under investments.
and under investments.
Page 5
Capital Budgeting
Capital Budgeting
?
Meaning of capital budgeting
Meaning of capital budgeting
?
Significance
Significance
?
Capital budgeting process
Capital budgeting process
?
Investment criteria
Investment criteria
?
Methods of capital budgeting
Methods of capital budgeting
Meaning
Meaning
?
The process through which different projects
The process through which different projects
are evaluated is known as capital budgeting
are evaluated is known as capital budgeting
?
Capital budgeting is defined “as the firm’s
Capital budgeting is defined “as the firm’s
formal process for the acquisition and
formal process for the acquisition and
investment of capital. It involves firm’s
investment of capital. It involves firm’s
decisions to invest its current funds for
decisions to invest its current funds for
addition, disposition, modification and
addition, disposition, modification and
replacement of fixed assets”.
replacement of fixed assets”.
?
“
“
Capital budgeting is long term planning for
Capital budgeting is long term planning for
making and financing proposed capital
making and financing proposed capital
outlays”- Charles T Horngreen.
outlays”- Charles T Horngreen.
?
“
“
Capital budgeting consists in planning
Capital budgeting consists in planning
development of available capital for the
development of available capital for the
purpose of maximising the long term
purpose of maximising the long term
profitability of the concern” – Lynch
profitability of the concern” – Lynch
?
The main features of capital budgeting are
The main features of capital budgeting are
a. potentially large anticipated benefits
a. potentially large anticipated benefits
b. a relatively high degree of risk
b. a relatively high degree of risk
c. relatively long time period between the
c. relatively long time period between the
initial outlay and the anticipated return.
initial outlay and the anticipated return.
- Oster Young
- Oster Young
Significance of capital budgeting
Significance of capital budgeting
?
The success and failure of business mainly
The success and failure of business mainly
depends on how the available resources are
depends on how the available resources are
being utilised.
being utilised.
?
Main tool of financial management
Main tool of financial management
?
All types of capital budgeting decisions are
All types of capital budgeting decisions are
exposed to risk and uncertainty.
exposed to risk and uncertainty.
?
They are irreversible in nature.
They are irreversible in nature.
?
Capital rationing gives sufficient scope for the
Capital rationing gives sufficient scope for the
financial manager to evaluate different proposals
financial manager to evaluate different proposals
and only viable project must be taken up for
and only viable project must be taken up for
investments.
investments.
?
Capital budgeting offers effective control on cost
Capital budgeting offers effective control on cost
of capital expenditure projects.
of capital expenditure projects.
?
It helps the management to avoid over investment
It helps the management to avoid over investment
and under investments.
and under investments.
Capital budgeting process involves the following
Capital budgeting process involves the following
1. Project generation
1. Project generation
: Generating the proposals for
: Generating the proposals for
investment is the first step.
investment is the first step.
The investment proposal may fall into one of the following
The investment proposal may fall into one of the following
categories:
categories:
?
Proposals to add new product to the product line,
Proposals to add new product to the product line,
?
proposals to expand production capacity in existing
proposals to expand production capacity in existing
lines
lines
?
proposals to reduce the costs of the output of the
proposals to reduce the costs of the output of the
existing products without altering the scale of operation.
existing products without altering the scale of operation.
?
Sales campaining, trade fairs people in the industry, R
Sales campaining, trade fairs people in the industry, R
and D institutes, conferences and seminars will offer
and D institutes, conferences and seminars will offer
wide variety of innovations on capital assets for
wide variety of innovations on capital assets for
investment.
investment.
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FAQs on PPT - Capital budgeting - Accountancy and Financial Management - B Com
| 1. What is capital budgeting? |  |
Ans. Capital budgeting refers to the process of evaluating and selecting long-term investment projects that are expected to generate cash flows over an extended period. It involves analyzing the potential profitability, risks, and financial feasibility of investment opportunities to determine their value and suitability for a company's capital allocation.
| 2. What are the methods used in capital budgeting? | |
Ans. There are several methods used in capital budgeting, including:
1. Payback Period: This method calculates the time required to recover the initial investment by considering the cash inflows generated by the project.
2. Net Present Value (NPV): NPV compares the present value of expected cash inflows with the present value of cash outflows. A positive NPV indicates that the project is expected to generate more cash inflows than outflows and is therefore considered favorable.
3. Internal Rate of Return (IRR): IRR is the discount rate at which the present value of cash inflows equals the present value of cash outflows. It represents the project's rate of return and is used to assess its profitability.
4. Profitability Index (PI): The profitability index measures the ratio of the present value of cash inflows to the present value of cash outflows. A PI greater than 1 indicates that the project is expected to generate positive net cash flows.
5. Accounting Rate of Return (ARR): ARR calculates the average annual profit generated by the project as a percentage of the initial investment.
| 3. How does capital budgeting help in decision making? | |
Ans. Capital budgeting helps in decision making by providing a systematic framework to evaluate investment opportunities. It helps businesses determine which projects are financially viable and align with their long-term goals. By considering factors such as cash flows, profitability, risks, and financial feasibility, capital budgeting enables companies to make informed decisions regarding resource allocation and investment priorities. It also helps in identifying the most profitable projects and allocating limited resources efficiently.
| 4. What are the key factors to consider in capital budgeting decisions? | |
Ans. Several key factors should be considered in capital budgeting decisions, including:
1. Cash Flows: The estimation and analysis of cash inflows and outflows associated with the project are crucial. Accurate forecasting of future cash flows is essential for determining the project's profitability and potential financial risks.
2. Risk Assessment: Evaluating the potential risks and uncertainties associated with the project is important. Factors such as market conditions, competition, regulatory changes, and technological advancements should be considered to assess the project's risk profile.
3. Cost of Capital: The cost of capital, which represents the company's required rate of return, should be considered to assess the project's profitability. The project's expected returns should exceed the cost of capital to justify the investment.
4. Time Value of Money: The concept that money received or paid in the future has a different value than money received or paid today should be considered. Cash flows should be discounted to their present value to reflect the time value of money.
5. Strategic Alignment: Capital budgeting decisions should align with the company's strategic goals and long-term objectives. Projects that contribute to the company's competitive advantage, growth, and sustainability should be prioritized.
| 5. How can sensitivity analysis be used in capital budgeting? | |
Ans. Sensitivity analysis is a technique used in capital budgeting to assess the impact of changes in key variables on the project's financial outcomes. It helps in understanding the project's sensitivity to different scenarios and provides insights into its risks and uncertainties. By varying factors such as sales volume, costs, and discount rates, sensitivity analysis allows decision-makers to assess the project's robustness and identify the variables that have the most significant impact on its profitability. This analysis helps in making more informed decisions by considering different possible outcomes and their associated risks.
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