Question

discuss capital budgeting methods and process. Could you apply the knowledge your learn to make better decisions in your personal life or professional duties?

Answer 1

Capital budgeting is the process through which different projects are evaluated that is whether the project is beneficial or not for the company

The below are the capital budgeting methods:

a) Payback Period : In this method, we calculate the number of years it takes to return the initial cash flow invested. The lower this period is the project is preferred

b) Net Present Value : In this method, project with positive net present value are considered. The initial cash outflow is compared with the present value of cash inflow to calculate the NPV of the project using a discount rate of the company.

c) Internal Rate of return : This is the minimum rate the project should fetch. At this rate the NPV of the project is zero. Project with higher IRR are considered

d) Profitability Index : This is the ratio of present value of future cash flows of a project to the initial investment in the project.

e) Discounted payback period : This method is similar to payback period except here the cash flows are discounted to their present value and than the payback period is calculated.

Yes, the above techniques for project evaluation can help in making better decisions if we have correct projections in our hand.