Capital Budgeting: Types and Techniques Management YouTube Lecture Handouts

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Capital Budgeting: Types and Techniques Management

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

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

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