Question

how capital budgeting concept is applied to plywood industry

Answer 1

Capital Budgeting- It is a technique of evaluating the future cash flows, related to a project or investment. Capital budgeting used in almost each and every industry. It involves the decision of accepting or rejecting a particular project on the basis of cost benefit analysis. It also takes the decision of buying a new asset or repairing and replacing the existing asset. This concept is very important in finance. It enables managers to take the decisions regarding capital expenditures.

Capital budgeting methods: These are as following:

• Payback period
• Net present value (NPV)
• Internal rate of return (IRR)
• Profitability Index

Capital budgeting concept is applied to plywood industry- Yes, it is applied to plywood industry, plywood industry manufactures the plywood from the raw material (hardwood and softwood) Raw material comes from wood of trees, plywood is made with the thin layers of wood, for that purpose, wood is processed in the factory.

Plywood Companies have many capital expenditures that they have to evaluate with the help of capital budgeting techniques, these CAPEX are:

• Raw material sources.
• Setting up the factory for manufacturing plywood.
• Buying the machines for processing woods into thin layers.
• Buying machines for making plywood sheet and fabrication.
• Wood cutting machines

Conclusion- Capital budgeting plays an important role in plywood industry as well, it is a manufacturing industry that incur capital expenditures, for financing those CAPEX, companies need to evaluate the projects and future cash flows, if the expected cash inflow is greater than expected cash outflow then the project should be approved.