Question

discuss how you think companies make capital budgeting decisions and how the process would be different during special times, such as pandemic?

Answer 1

Capital Budgeting- It is a Long term investment of a company which will give yields over a number of years

Capital budgeting is important to businesses' long-term growth as capital investments are big financial decisions which involve a lot of money

Thus Making poor capital investment decisions can have a bad effect on a business

Companies make Capital Budgeting decisions comparing the Rate of Return that the project will earn against its Weighted average cost of capital .

If the ROI is greater than Companies WACC then the company will be in better condition to invest in the project

But if it is less than the project is not the appropriate investment to do.

Above Comparision involves Financial Analysis to estimate the cash flows that the project will generate in the near future.

There are total 5 methods for capital budgeting techniques

Payback Period, Discounted Payment Period, Net Present Value, Profitability Index, Internal Rate of Return, and Modified Internal Rate of Return.

During special times like pandemic it is very difficult to determine the future cash flows of the company or a project due to economic down turn

In such times companies usually make very less Profit thus it becomes difficult for them to make any long term commitments like capital budgeting

Unless the company is having large capital in its books and is investing in something which is in great demand during the pandemic

Thus During special times

Capital budgeting would highly depend on the future cash flows of the project and thus demand for the product in the market