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CAPITAL BUDGETING






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Demerits or Limitations of Discounted Cash Flow Method

The method suffers from the following disadvantages

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Merits of Discounted Cash Flow Method

The method is regarded as superior to other methods of investment appraisal in several ways

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Present Value Method

The method is also known as 'Time adjusted rate of return' or 'internal rate of Return' Method or Discounted cash-flow method In recent years, the method has been recognised as the most meaningful technique for financial decisions regarding future commitments and projects.

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Demerits of Return Method

The method suffers from the following weaknesses

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Merits of Accounting Rate of Return Method

The following are the merits of the accounting rate of Return method

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Unadjusted Rate of Return Method

The method is also known as Accounting Rate of Return (ARR) Method because accounting information as revealed by the financial statement are used to measure the profitability of the investment proposals.

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Limitations of Pay-back Method

The pay-back approach suffers from the following limitations

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Merits of Pay-back Method

The pay-back method is widely accepted method for .evaluating the various proposals.

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Computation of Pay-back Method

If annual net cash-inflows are even or constant, the pay-back period can be computed dividing cash outlay original investment) by the annual cash-inflow.

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Pay-Back Method

This method is popularly known as pay-off, pay out or replacement period methods also. It is the most popular and widely recognised traditional method of evaluating capital projects.

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Degree of Urgency Method

Virtually it is not a method of evaluation of a project. Sometimes, business operations are manged on an ad-hoc basis ad not as a part of well conceived plan.

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Methods of evaluating capital expenditure proposals

There are number of methods in use for evaluating a capital investment proposal. Different firms may use different methods for evaluating the project proposals.

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Significance of Capital Budgeting

The key function of the financial management is the selection of the most profitable assortment of capital investment and it is the most important area of decision-making of the financial manger because any action taken by the manger in this area affects the working and the profitability of the firm for many years to come.

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Procedure of Capital Budgeting

Capital investment decision of the firm have a pervasive influence on the entire spectrum of entrepreneurial activities so the careful consideration should be regarded to all aspects of financial management.

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Nature of Capital Budgeting

Nature of capital budgeting can be explained in brief as under

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Meaning of Capital Budgeting

Capital expenditure budget or capital budgeting is a process of making decisions regarding investments in fixed assets which are not meant for sale such as land, building, machinery or furniture.

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