Are you struggling to find capital budgeting assignment help? Meet our financial experts to guide you through any finance problem. Capital budgeting is the process of evaluating and appraising long term investments and finding out if they are worthwhile. There are different capital budgeting techniques which are used to determine potential investments and expenses in the long run. Examples of long run investment plans include; purchase or replacement of fixed assets, introduction of a new product and market expansion. Investment appraisal provides the best way in which the limited organization funds can be invested to generate maximum benefits or profits.
Understanding capital budgeting is key to effective financial planning in an organization. Students undertaking financial management are normally presented with different investment alternatives then are required to rank them. We are dedicated at ensuring that you find quality and easy to follow capital budgeting assignment help. Our team of qualified experts have deep experience when it comes to use and application of different capital budgeting techniques.
The process of capital budgeting involves the following
- Project generation
This is the presentation of ideas about the new project. The idea may vary from introduction of new product, market expansion or purchase or replacement of a fixed asset; but basically revolves around proposal for a new project.
- Project evaluation
Project evaluation is the analysis of the costs and benefits while considering the different risks and uncertainties that might arise in the future. Projects should be evaluated and selected depending on the goals and aims of the organization.
- Project approval
There is no standard accepted procedure for project approval; it varies from one organization to another. Depending on the administrative structure of the organization the project is then passed through the necessary capital expenditure approval stages prior to financing and implementation.
- Project financing
After project approval, it is the duty of the financial manager to seek for the appropriate source of funds. This stage involves raising finance through the various channels available while minimizing the cost to be incurred.
Capital budgeting techniques
Capital budgeting techniques can be broadly classified into two; discounting and non- discounting capital budgeting techniques.
- Discounting capital budgeting techniques
Discounting capital budgeting is also referred to as time adjusted or modern method of capital budgeting technique; since it considers the time value in capital budgeting calculations. The following are the commonly used discounting capital budgeting techniques.
- Net present value (NPV)
Net present value discounts the cash inflows at different time intervals using a particular rate and then deducting the initial cash outflow or investment. Decision rule while using NPV is to accept all projects with positive NPV value. Mathematically, NPV can be calculated as shown below:
Where Ct is the cashflow
K is the opportunity cost of capital
Io is the initial cash outflow
n is the useful life of the project
- Internal rate of return (IRR)
The internal rate of return of a project is that rate of return that results to a zero NPV. In other words, IRR makes the present value of cash inflows to be equal to cash outflows. Decision rule when using IRR is to accept a project where the IRR is greater than the cost of capital.
Where r = internal rate of return
- Profitability index (PI)
Profitability index is the ratio of the present value of profits at a required rate of return to initial cost of investment. The decision rule when using profitability index is to accept projects with a profitability index greater than one. The formula for calculating PI is:
- Non discounting capital budgeting techniques
Non discounting capital budgeting techniques are also known as traditional capital budgeting techniques; since they don’t factor in the time value for money. It comprises of the following two techniques
- Accounting rate of return
The rate of return is expressed as a fraction of percentage of the projects earnings. The decision rule under accounting rate of return is to select the project with the highest accounting rate of return. Mathematically expressed as shown below
ARR = Average annual income
Where Average annual income = Average cashflows – Average Depreciation
Average investment = 1/2 (Cost of investment – Salvage value)
(assuming straight line depreciation method).
- Payback period
Payback period is time required by a project to generate a cash equivalent to the initial cost of investment. The decision rule is to select a project with a shorter payback period. Payback period is calculated as follows
Payback period = Cash outlay (investment) / Annual cash inflow
Capital budgeting assignment help
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