Question

What is capital budgeting? What are some of the tools used in capital budgeting? How are they used?

Answer 1

Capital Budgeting

Capital budgeting is the way toward deciding the suitability to long haul ventures on buy or substitution of property plant and hardware, new product offering or different tasks.

The majority of the above strategies depend on the examination of money inflows and outpouring of an undertaking anyway they are considerably extraordinary in their approach.

These are some tools of capital budgeting, these are used to decide feasibility of projects.

Payback Period measures the time in which the underlying income is returned by the task. Money streams are not marked down. Lower payback period is favored.

Net Present Value (NPV) is equivalent to beginning money surge less total of marked down money inflows. Higher NPV is favored and a speculation is just reasonable if its NPV is certain.

Accounting Rate of Return (ARR) is the profitability of the venture ascertained as anticipated aggregate net wage isolated by starting or normal speculation. Net pay isn't marked down.

Internal Rate of Return (IRR) is the rebate rate at which net present value of the task winds up noticeably zero. Higher IRR ought to be favored.

Profitability Index (PI) is the proportion of present value of future money streams of a venture to beginning speculation required for the task.

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