Capital Budgeting
One of the most important decisions a financial manager can make involves capital budgeting. Capital budgeting is used to determine which fixed assets should be purchased. The purchasing of fixed assets is a form of a longterm investment. Allocating funds in the capital account is a form of capital budgeting. A financial manager will determine if the purchase of a capital asset or fixed asset is worth more over that assets life then it is for the cost to purchase it. In other words, they make sure that the asset would get the amount it cost plus a profit in return.
Financial managers cannot seem to agree on a specific method that works better than the other when it comes to estimating and budgeting. Even in the …show more content…
The Payback Rule When talking about “payback,” it is referring to the amount of time it takes to regain the amount it cost a business to pay for the investment. In other words, how many years does it take to generate enough cash flows from the investment to cover its costs. It can also be seen as the amount of time it takes for an investment to “breakeven.” The amount of time is a predetermined amount, and that amount is what is factored in when determining if the investment is a good investment. For example, if a company decides they want to invest in a capital asset that would take less than five years to payback, and after calculating the cash flows and determine it will take only three years to payback or generate enough from the investment, than the investment is a good investment. There is no set rule when determining how much time an investment should have for the payback. That is up to the discretion of the financial managers. One issue with the payback method is that it ignores time value. When estimating the cash flows and the payback, it is good to project over the entire allotted time span on what the cash flows would be.

Capital Budgeting
2950 Words  12 PagesChapter 10 CAPITAL BUDGETING AND RISK ANSWERS TO QUESTIONS: 1. The net present value model handles risk by discounting expected cash flows from a project by the firm's cost of capital. This discount rate is based upon the firm's average risk level. To the extent that a project has more than or less than average risk, the use of the firm's cost of capital will not make the appropriate risk adjustments. The basic model also does not explicitly consider the variability of a project's…

Capital Budget : Capital Budgeting
1838 Words  8 Pagesproject’s potential cost and benefit, this analysis is known as capital budgeting. Authors Besley & Brigham of the text book CFIN 4, 4th Edition explain, “Thus, the capital budget is an outline of planned expenditures on fixed assets, and capital budgeting is the process of analyzing projects and deciding (1) which are acceptable investments and (2) which should actually be purchased.” (Besley & Brigham, 2015, pg. 145). Creating a capital budget and forecast that is as close as possible to the realized…

Capital Budgeting
1414 Words  6 PagesWeek 4 Discussion Question 1b Introduction Capital budgeting is one of the most crucial decisions the financial manager of any firm is faced with...Over the years the need for relevant information has inspired several studies that can assist firms to make better decisions. These models are assigned so that they make the best allocation of resources. Early research shows that methods such as payback model was more widely used which is basically just determining the length of time required for the…

Capital Budgeting
5568 Words  23 PagesCAPITAL BUDGETING MEANING OF CAPITAL BUDGETING Capital budgeting is the making of long term planning decision for investment fixed assets and their financing. Capital budgeting decision is concerned with current investment that will pay for itself and yield an acceptable rate of return over its life span. Hampton (1992) defines capital budgeting as the decision making process by which firms evaluate the purchase of major fixed assets, including buildings, equipment. It also covers decisions to…

Capital Budgeting
2563 Words  11 Pagesgeting1.0 INTRODUCTION Capital budgeting plays an important role in a firm’s financial management, the selection of a project is of great importance because it required a very large capital expenditure which will have a significant impact on the financial performance of the firm. Therefore a mistake in capital budgeting process by a firm will cost them a long period of time. Capital budgeting can be defined or seen as a designed process which involves management of available resources to select…

Corporate Budgeting : On Capital Budgeting
1589 Words  7 Pageson capital budgeting. In ordinary world capital budgeting means analyzing the profitability of investment. Further, how distinct principles are associated with the capital budgeting is explained. This chapter also introduced a new principle, “Individual Respond to Incentives”. This principle elaborates how managers reacts towards the deserving incentives. Capital budgeting allow businesses determine best profit generating investment plan and evaluate its profitability. The Capital Budgeting process…

Capital Budgeting in Reliance Capital
14380 Words  58 PagesCAPITAL BUDGETING AT RELIANCE CAPITAL Specialization: Finance Under the Guidance of: Submitted By: Mr. Debashish Chaudary Prarthana Bajaj Mrs. Archana Singh Nupur Singhal Utsav Goel Taruna Bhadana Arjun…

Capital Budgeting : Budgeting Techniques
817 Words  4 PagesCOMPARING CAPITAL BUDGETING TECHNIQUES In a company, when evaluating multiple opportunities for investment, capital budgeting is an important tool that is used. Every company has a certain amount of capital available that they need to use in the most effective way possible. Capital budgeting involves analysis techniques, planning and justifying how capital dollars are spent on long term assets and projects. It provides methods through which projects are evaluated to decide whether they make sense…

Capital Budgeting
3643 Words  15 PagesReport on Capital Budgeting Abstract This report deals with • The nature of capital investment appraisal • The techniques available for evaluating capital investments • The limitations of these techniques • The capital budgeting practices in select countries Introduction: Some of the major responsibilities of top management are in the area of long range planning. Allocating resources to competing uses is one of the most important decisions a manager has to make. Executives are constantly…

Capital Budgeting : Capital And Budgeting
943 Words  4 PagesCapital budgeting Capital budgeting, which is also called "investment appraisal," is the planning process used to determine which of an organization 's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is to budget for major capital investments or expenditures. Major Methods Many formal methods are used in capital budgeting, including the techniques as followed: • Net present value • Internal rate…
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