CAPITAL BUDGETING DECISIONS

Investment decisions of a firm are generally known as the capital budgeting or capital expenditure decisions. A capital budgeting is definitely the firms decisions o invest its current funds most efficiently in the long term assets. In anticipation of an expected flow of advantages over a series of years. Samples of capital spending budget decisions happen to be: - -Expansion of business.

-Acquisition of another firm.

-Replacement and modernization assets.

-Research and development program.

-Purchase of new assets.

-Development of new products lines.

i)The steps require in capital budgeting procedure are Job generation

Job evaluation

Job selection

Job execution

ii)Difficulties faced in capital budgeting inside the real world •It is difficult to have complete data or information relating to a project. •Uncertainty on the expense of capital (minimum rate of return essential by the traders. •It is difficult to calculate a projects future earnings. •There are numerous qualitative concerns that would have to be taken into account e. g. accessibility to power, labour, effect on environment, expected changes in technology, displacement of time etc . not necessarily possible to consider all the qualitative factors. •It is not possible to estimation the monetary useful existence of the task accurately. •Conflicts between some of the investment appraisal techniques elizabeth. g. the internet Present Value (NPV) and Internal Charge of Comes back (IRR) issue in position of some of the mutually exclusive projects. iii)Classification of Investments

a)Mutually Exclusive Assets

These are alternate options which serve precisely the same purpose and compete with one another. If the company is for illustration considering three mutually exclusive expense and one is chosen, the other two would automatically become rejected inspite of their viability. b)Independent Opportunities

These investments serve diverse purposes and don't compete with one another. If the organization is for illustration considering 5 independent projects, all of them could be undertaken as well subject to their very own viability and availability of funds. c)Contingent Expense

They are dependent projects. The choice of one investment requires that one or maybe more other investments should also become undertaken at the. g. if the company determines to build a factory in a remote location, it may have to invests in residences, roads, hospitals, schools and many others for employees to be able to attract the job force. CAPITAL BUDGETING TECHNIQUES

The capital cash strategy techniques can be grouped in to categories a)Non discounted earnings techniques (traditional method) They are: -

Accounting charge of returning (ARR)

Payback period (PBP)

b)Discounted earnings techniques (modern Methods)

These are:

oNet Present value (NPV)

oInternal Charge of return (IRR)

•Profitability Index (PI)

NON DISCOUNTED CASH FLOW APPROACHES

i)Accounting rate of return (ARR)

It is also called return on investment (ROI). This technique uses accounting data as unveiled by financial statement. ( P & L balance sheet) to measure the earnings of an investment. ARR sama dengan Average Income x100

Common Investment

Popularity Rule

The management establishes or fixes the bare minimum acceptable accounting rate of return. A project with a great ARR over a rate set by the management would be turned down. The project with the greatest ARR can be ranked because number 1 even though the project while using lowest ARR comes last. Advantages of ARR

•It is not hard to understand and use

•It is worked out from accounting data which is ready readily available from the monetary statement of any business organization. •It uses returns occurring from the whole life of the project in determining the job profitability. •It is cheap for it does not need use of computer systems...

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