[AMFINANCE] M3 | CAPITAL BUDGETING TECHNIQUES

Financial decision making

is viewed as an integral part of the overall management of a business concern. The financial manager has tomake the financial decision within the framework  of  overall  corporate  objectives  and  policies.  

1. Investment Decisions

2. Financing Decision

3. Dividend Decision

The  decisions  in  financial management has been divided in to three categories. (3)

selection of assets

The investment decision relates to the ___________ in which funds will be invested by a firm.

a) Long term assets

b) Short term assets

The assets that can be acquired with these funds are broadly divided into: (2)

Working Capital management, Capital Budgeting.

The decision regarding:

short term assets is designated as ________________.

long term assets known as ___________.

Capital budgeting

is the long-term investment decision. It  is probably the most crucial financial decision of a firm. It relates to the selection of an asset or investment proposal or course of action that benefits are likely to be available in future over the lifetime of the project. Is the process of making investment decision in long-term assets or courses of action.

Capital expenditure

____________ incurred today is expected to bring its benefits over a period of time. These expenditures are related to the acquisition & improvement of fixes assets.

Independent projects (Accept-Reject criterion)

[Types of Capital Budgeting Decisions]

are the projects which do not compete with one another. Based on the profitability of the projects and the availability of funds, a company undertakes any number of projects. In such a case, projects will betaken up to a level where marginal cost of funds equal to marginal rate of return of the project.

Mutually exclusive projects

[Types of Capital Budgeting Decisions]

acceptance of one project results into rejection of another project. For example if there are two projects X and Y, either X or Y or Y should be accepted by the company

Capital rationing decision

[Types of Capital Budgeting Decisions]

A firm may have several profitable investment proposals but only limited funds to invest. In such a case, these various investment proposals compete for limited funds, and thus, the firm has to ration them. The firm selects the combination of proposals that will yield the greatest profitability by ranking them in descending order of their profitability.