Question

“Can we apply capital budgeting techniques within the public sector? Explain using current event examples or examples from the text”.

Answer 1

Solution:-

CAPITAL BUDGETING TECHNIQUES IN PUBLIC SECTOR

Before discussing about the applicability condition of capital budgeting techniques in public sector we need to understand what is capital budgeting techniques what are the techniques available for capital budgeting. Capital budgeting techniques is a set of techniques which is used to decide which investment to be made for a project for a better manner .it is actually estimating the amount of all cash inflow and cash outflow associated with a project with an estimated useful life, moreover apply discounted rate to these cash flow to find out the present value. Capital Budgeting techniques are Profitability Index, Payback Period, Net Present Value, Internal rate of return and Modification Rate of Return.

Here, we are discussing about the applicability of capital budgeting techniques in public sector. One of the most vital function of public sector entity is to construct ,maintain the public infrastructural facilities. Mainly the capital investment is made in water plants, Road, Railways and other public infrastructural facilities etc. We simply say that the capital budgeting techniques and Capital decision models are developed mainly for private sector entities but it may useful for public sector entities. We mentioned some capital budgeting techniques above, among that pay back method is the most widely used method for both in public sector and private sector. Internal Rate of return widely used in private sector and Net present value method is also used in private sectors.