# Capital Budgeting: Types and Techniques Management YouTube Lecture Handouts

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## Meaning

- The process of Planning where to invest the capital outlay so that efficient utilization of finance happens.
- It includes the both raising and utilization of long-term funds only.

## Types of Capital Budgeting

**Accept reject Decisions**: The company decides whether to accept or reject a project. If the Net Present Value is positive, the project is accepted.**Mutually Exclusive Decisions**: Here the company has two projects and has to choose one out of two.**Capital Rationing Decisions**: Here there are huge number of projects with the company and it has to choose one.

## Techniques of Capital Budgeting

### Non-Discounted Techniques

#### Payback Period

The time in which the cash outflows are the payback period of a particular project.

**Formula**:

**Payback Period**

#### Average Accounting Rate of Return

**Formula**:

**ARR =**

**Average investment**

### Discounted Techniques

#### Net Present Value

- It is the difference between the Present value of cash inflows and outflows.
- If the present value is positive, then the project is acceptable.

**Formula**:

**Profitability Index =****If PV > 1, One should accept the decision**

#### Internal Rate of Return

- It is the rate of return at which the Net Present Value is 0
- PV of cash inflows = PV of cash outflows

## MCQs

**Capital budgeting is used for?**

1. Capital structure decisions

2. Investment decisions

3. Dividend decisions

4. Philanthropy

**Under which method Capital budgeting the future cash inflows are discounted?**

1. Discounted Payback

2. Profitability index

3. Net Present Value

4. None of the above

✍ Manishika