Question

1)  In essay format in detail provide arguments for on the importance of capital budgeting decisions in terms of creation of value.

Answer 1

Capital budgeting and investment appraisal, is the planning process used to determine whether an organization's long term investment such as new machinery, replacement of machinery, new plants, new products and research development project are worth the funding of cash through the firm's capitalization structure. Planning the eventual return on nvestments in machinery, real estate and new technology are all example of capital budgeting.

Different techniques of Capital Budgeting are as follows:

1. Payback Period
2. Discounted payback period
3. Net present value
4. Accounting rate of return
5. Internal rate of return
6. Profitability ndex

Advantages:

• Capital budgeting helps a company to understand the various risk involved in an investment opportunity and how these risk affect the return of the company.
• It helps the company to estimate which investment option would yield the best possible retun.
• Capital budgeting is important because it creates accountability and measurability.
• A capital budgeting descision is both a financial commitment and an investment
• Controling capital cost is also an objective of capital budgeting.

There are varities of method available in capital budgeting and also lot of benefits.The managers statement that capital budgeting is totally waste of time is not correct. Also capital budgeting is easy to understand various techniques availableto get desired result.