Question

Assume you are a new manager in the Financial Analysis department and are orienting a team of new college graduates to the world of capital budgeting.

In your initial post, explain the uses of the common capital budgeting tools to them. Explain what they are, and how you use them in your daily tasks. Make sure to explain any financial terminology

Answer 1

INTRODUCTION FOR CAPITAL BUDGETING :-The process of capital budgeting is vital to any responsible, well managed business. If that business is public and owned by public shareholders, the budgeting process becomes more crucial, since shareholders can hold management accountable for accepting unprofitable projects that can have the effect of destroying shareholder value.

CAPITAL BUDGETING PROCESS :- the major stages in the capital budgeting process can be started as follows :

1) Generation of project.

2) Evaluation of the project.

3) Selection of the project.

4) Execution of the project.

In some cases, the capital budgeting process may include a few more stages in to the above.

CAPITAL BUDGETING TOOLS :- these methods can be categorized as follows.

1. Traditional methods :

1) pay back period method.

2) accounting rate of return method.

2. Modern techniques : (Discounted cash flow methods ​​).

1) the net present value method (NPV method).

2) internal rate of return method (IRR method).

3) profitability index or benefit cost ratio method (PI or  ​​​​​BC ratio method).

CONCLUSION :- As explained above, there are various techniques to appraise investment proposals. No single technique is said to be appropriate in all circumstances. For example MNC's may prefer pay back period method when they set up projects in other countries keeping in view the turbulent political conditions. However, in general NPV method is regarded as more reliable since it can satisfy many groups, if cost of capital is known. Large organizations may be follow more then one method to make their estimations as much accurate as possible. The success of any evaluation method depends on scientific and accurate estimation of various types of cash flows.