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UNIT-II CAPITAL BUDGETING
Capital budgeting- Meaning and significance; Techniques of capital budgeting- Conceptual perspectives of various techniques of capital budgeting with their merits and demerits; Payback period, average rate of return, net present value, profitability index and internal rate of return?
Capital budgeting- Meaning and significance; Techniques of capital budgeting- Conceptual perspectives of various techniques of capital budgeting with their merits and demerits; Payback period, average rate of return, net present value, profitability index and internal rate of return?
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UNIT-II CAPITAL BUDGETINGCapital budgeting- Meaning and significance; ...
Capital Budgeting: Meaning and Significance
Capital budgeting refers to the process through which an organization evaluates and selects long-term investments. It is crucial for ensuring that capital is allocated efficiently to projects that will yield the highest returns. Effective capital budgeting is significant for:
- Resource Allocation: Ensures optimal use of limited resources.
- Long-term Planning: Supports strategic planning and growth initiatives.
- Risk Management: Aids in assessing the risks associated with investments.
Techniques of Capital Budgeting
Various techniques are employed in capital budgeting, each with its own merits and demerits:
1. Payback Period
- Definition: The time taken to recover the initial investment.
- Merits:
- Simple to calculate and understand.
- Useful for liquidity assessment.
- Demerits:
- Ignores cash flows beyond the payback period.
- Does not consider the time value of money.
2. Average Rate of Return (ARR)
- Definition: The average annual profit from an investment, expressed as a percentage of the initial investment.
- Merits:
- Simple and easy to interpret.
- Useful for comparing different projects.
- Demerits:
- Ignores the time value of money.
- Can be misleading if cash flows vary significantly.
3. Net Present Value (NPV)
- Definition: The difference between the present value of cash inflows and outflows.
- Merits:
- Considers the time value of money.
- Directly assesses profitability.
- Demerits:
- Requires accurate cash flow projections.
- May be complex for some users.
4. Profitability Index (PI)
- Definition: The ratio of the present value of future cash flows to the initial investment.
- Merits:
- Useful for ranking projects.
- Considers the time value of money.
- Demerits:
- Requires accurate cash flow estimates.
- Can be misleading for mutually exclusive projects.
5. Internal Rate of Return (IRR)
- Definition: The discount rate that makes the NPV of an investment zero.
- Merits:
- Reflects the time value of money.
- Useful for comparing different projects.
- Demerits:
- Can give multiple values for non-conventional cash flows.
- May lead to incorrect decisions if used alone.
Each of these techniques serves a purpose in the capital budgeting process, and understanding their strengths and weaknesses is vital for effective investment decision-making.
Capital budgeting refers to the process through which an organization evaluates and selects long-term investments. It is crucial for ensuring that capital is allocated efficiently to projects that will yield the highest returns. Effective capital budgeting is significant for:
- Resource Allocation: Ensures optimal use of limited resources.
- Long-term Planning: Supports strategic planning and growth initiatives.
- Risk Management: Aids in assessing the risks associated with investments.
Techniques of Capital Budgeting
Various techniques are employed in capital budgeting, each with its own merits and demerits:
1. Payback Period
- Definition: The time taken to recover the initial investment.
- Merits:
- Simple to calculate and understand.
- Useful for liquidity assessment.
- Demerits:
- Ignores cash flows beyond the payback period.
- Does not consider the time value of money.
2. Average Rate of Return (ARR)
- Definition: The average annual profit from an investment, expressed as a percentage of the initial investment.
- Merits:
- Simple and easy to interpret.
- Useful for comparing different projects.
- Demerits:
- Ignores the time value of money.
- Can be misleading if cash flows vary significantly.
3. Net Present Value (NPV)
- Definition: The difference between the present value of cash inflows and outflows.
- Merits:
- Considers the time value of money.
- Directly assesses profitability.
- Demerits:
- Requires accurate cash flow projections.
- May be complex for some users.
4. Profitability Index (PI)
- Definition: The ratio of the present value of future cash flows to the initial investment.
- Merits:
- Useful for ranking projects.
- Considers the time value of money.
- Demerits:
- Requires accurate cash flow estimates.
- Can be misleading for mutually exclusive projects.
5. Internal Rate of Return (IRR)
- Definition: The discount rate that makes the NPV of an investment zero.
- Merits:
- Reflects the time value of money.
- Useful for comparing different projects.
- Demerits:
- Can give multiple values for non-conventional cash flows.
- May lead to incorrect decisions if used alone.
Each of these techniques serves a purpose in the capital budgeting process, and understanding their strengths and weaknesses is vital for effective investment decision-making.
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UNIT-II CAPITAL BUDGETINGCapital budgeting- Meaning and significance; Techniques of capital budgeting- Conceptual perspectives of various techniques of capital budgeting with their merits and demerits; Payback period, average rate of return, net present value, profitability index and internal rate of return?
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UNIT-II CAPITAL BUDGETINGCapital budgeting- Meaning and significance; Techniques of capital budgeting- Conceptual perspectives of various techniques of capital budgeting with their merits and demerits; Payback period, average rate of return, net present value, profitability index and internal rate of return? for B Com 2024 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about UNIT-II CAPITAL BUDGETINGCapital budgeting- Meaning and significance; Techniques of capital budgeting- Conceptual perspectives of various techniques of capital budgeting with their merits and demerits; Payback period, average rate of return, net present value, profitability index and internal rate of return? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for UNIT-II CAPITAL BUDGETINGCapital budgeting- Meaning and significance; Techniques of capital budgeting- Conceptual perspectives of various techniques of capital budgeting with their merits and demerits; Payback period, average rate of return, net present value, profitability index and internal rate of return?.
UNIT-II CAPITAL BUDGETINGCapital budgeting- Meaning and significance; Techniques of capital budgeting- Conceptual perspectives of various techniques of capital budgeting with their merits and demerits; Payback period, average rate of return, net present value, profitability index and internal rate of return? for B Com 2024 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about UNIT-II CAPITAL BUDGETINGCapital budgeting- Meaning and significance; Techniques of capital budgeting- Conceptual perspectives of various techniques of capital budgeting with their merits and demerits; Payback period, average rate of return, net present value, profitability index and internal rate of return? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for UNIT-II CAPITAL BUDGETINGCapital budgeting- Meaning and significance; Techniques of capital budgeting- Conceptual perspectives of various techniques of capital budgeting with their merits and demerits; Payback period, average rate of return, net present value, profitability index and internal rate of return?.
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