Capital Budgeting (Principles & Techniques)According to G. The consideration of investment opportunities involves the comparison of the expected future streams of earnings from a project with the immediate and subsequent streams of earnings from a project, with the immediate and subsequent streams of expenditure. It is simply long term planning for making and financing proposed capital investments or projects. Data is collected from various departments and requests of various department heads are also entertained while finalizing the projects and preparing a capital expenditure budget. Adequate funds are allocated to each projects and teams are appointed for implementation of the projects. It aims to identify any problems associated with implementation of the project and take corrective actions to ensure smooth execution of projects. All projects are not subjected to such audits but are reviewed to determine deviations in expected and actual performance.
There are different methods of analyzing the viability of an investment. Capital budgeting techniques are grouped in two: a Non-discounted cash flow techniques traditional methods i. Pay back period method PBP ii. Accounting rate of return method ARR b Discounted cash flow techniques modern methods iii. Net present value method NPV iv. Internal rate of return method IRR v. This technique applies cash flows and not accounting profits.
Capital investments are long-term investments in which the assets involved have useful lives of multiple years., Since capital budgeting describes the process by which all companies make decisions on their capital projects, it is not unusual for some fairly sophisticated techniques to be employed. Regardless of this, capital budgeting relies heavily on just a few basic principles.
You are currently using the site but have requested a page in the site. Would you like to change to the site? With the collapse of the economy and financial systems, many institutions are reevaluating what they are willing to spend money on. Project valuation is key to both cost effectiveness measures and shareholder value. The purpose of this book is to provide a comprehensive examination of critical capital budgeting topics. Coverage extends from discussing basic concepts, principles, and techniques to their application to increasingly complex, real-world situations.