CAPITAL BUDGETING DECISIONS

By: VIKRAM.G.BLecturer, P.G Dept. of Commerce

Vivekananda Degree College, B’lore-55

What are Capital Budgeting Decisions:-

The Investment Decisions are generally known as Capital Budgeting Decisions or Capital Expenditure Decisions.

It can be defined as the firm’s decision to invest its current funds most efficiently in the long-term assets in application of an expected flow of benefits over a series of years.

Ex. for Investment Decision:

Expansion, acquisition, modernization and replacement of long-term assets.

Sale of a division or business.

Change in the methods of sales distribution.

Change in the methods of advertising campaign.

Change in the methods of Research and development program.

Features:-

The exchange of current funds for future benefits.

The funds are invested in long-term assets.

The future benefits will occur to the firm over a series of years.

Types:-

1st Classification Expansion of existing business. Expansion of new business. Replacement and modernization.

2nd Classification Mutually exclusive investments. Independent investments. Contingent investments.

Capital Investment Process.

Search for Investment Opportunities.

Screening the Alternatives.

Analysis of Feasible Alternatives.

Evaluation of Alternatives.

Authorization.

Implementation & Control.

Investment Evaluation Criteria:-

Estimation of cash flows.

Estimation of the required rate of return.

Application of a decision rule for making the choice. Considering all cash flows to determine true

profitability. Separating good projects from bad projects. Ranking projects based on their true profitability. Recognizing Cash flows on several basis. Choosing among mutual exclusive projects which

maximizes S.H wealth.

Evaluation Criteria / Appraisal Techniques:-

Non-discounted Cash Flow Criteria: Payback Period (PBP). Discounted Payback period (DPBP). Accounting Rate of Return (ARR).

Discounted Cash Flows Criteria: Net present value (NPV). Internal Rate of Return (IRR). Profitability Index (PI).