Question

Once a company obtains capital, it needs to decide how it will best be used. Investments and projects are reviewed and analyzed to determine the best use of capital. Examine methods of analyzing project choices: Describe the term capital budgeting Identify and define three common techniques for analyzing projects

Answer 1

Capital Budgeting is a process to eveluate the viability of projects in the business. It is also used to find the best projects as per company's policy among the available projects and invest accordingy.

Common Techiniques:
1) NPV Method: in this we find the present value of all future inflows by discounitng with a desired rate of return and reduce the present value of all outflow to find the net benefit today form the project. Positive NPV means project will create shareholders wealth and worth investing.

2) Payabck Period: In this we find out that in how many years we will get the amount invested in the project. This method is used in Risky type of project where the future outflow is uncertain so company can find out the payback period. lower payback period is preferable.

3) Throughput Analysis: In this we find the bottleneck operation of the project. for example some company have limited labour force some have limited machine hours. so we find the profit per bottleneck unit. Project with higher bottleneck project will give highest return. Decisions are made upon the profit per bottleneck unit​.