Capital Budgeting

Published on March 2017 | Categories: Documents | Downloads: 44 | Comments: 0 | Views: 610
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Finance is often defined simply as the management of money or “funds” management. Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created for transacting and trading assets, liabilities, and risks. Finance is conceptualized, structured, and regulated by a complex system of power relations within political economies across state and global markets. Finance is both art e.g. product development! and science e.g. measurement!, although these activities increasingly converge through the intense technical and institutional focus on measuring and hedging risk"return relationships that underlie shareholder value. Finance is the set of activities dealing with the management of funds. More specifically, it is the decision of collection and use of funds. #t is a branch of economics that studies the management of money and other assets. Finance is also the science and art of determining if the funds of an organization are being used properly. Capital budgeting or investment appraisal! is the planning process used to determine whether an organization$s long term investments such as new machinery, replacement machinery, new plants, new products, and research development pro%ects are worth pursuing. #t is budget for ma%or capital, or investment, expenditures Many formal methods are used in capital budgeting, including the techni&ues such as 'ccounting rate of return (et present value )rofitability index #nternal rate of return Modified internal rate of return *&uivalent annuity +he process in which a business determines whether pro%ects such as building a new plant or investing in a long"term venture are worth pursuing. ,ftentimes, a prospective pro%ect$s lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark. 'lso known as -investment appraisal-.

Net Present Value .alculating the net present value is one of the most common ways to evaluate a capital budgeting process. #n order to perform this calculation, you will take the value of the present benefits of the pro%ect and subtract the present costs. +he difference provides you with the net present value. Internal Rate of Return 'nother popular method of evaluation is referred to as the internal rate of return. +his is a discount rate that is commonly used to determine how much of a return an investor can expect to realize from a particular pro%ect. Payback Period +he payback period is another method that many businesses use to determine whether to keep pursuing a pro%ect. /ith this method, you are basically determining how long it will take to pay back the initial investment that is re&uired to undergo a pro%ect. #n order to calculate this, you would take the total cost of the pro%ect and divide it by how much cash inflow you expect to receive each year. +his will give you the total number of years or the payback period.

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