Capital budgeting is the decision required for the long term investment. The examples for long term investment can be addition of plant & machinery, renovation of office, new office building etc. As per business term capital budgeting is a process in which business determines the potential expenses or investment in the business. There are many projects where business can invest into but what lacks is capital. So capital budgeting is a medium through which a company, organisation or a business can know where to invest and to what extend in order to make the project viable. It helps to compare between two or many projects. Many ratios and percentages can be calculated which helps to evaluate which is the best project among all so that the company would get the better return in earlier payback period. The various methods to evaluate the projects are NPV method, internal rate of return method, payback period and discounted cash flow method.
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To begin with NPV method which stands for Net present value; as per this method we can know the profitability of the project. It is the difference between present value of all cash flow minus present value of outflows and it take time value of money into consideration. If the result is positive then it is reliable to invest in the project or else it is not viable to spend in the project. The next method is IRR method which stands for internal rate of return. IRR method is the rate at which the inflows and outflows are evaluated and are compared with the expected rate of return. In this method rate is calculated which is compared with the expected rate. It is calculated in the same way as NPV method. The third method is Payback period, as per this method we come to know how sooner our investment will be recovered as per the inflows we get. So, this shows how fast the investment will be recovered. This helps to take the decision regarding the project in which we can invest. The fourth method is discounted cash flow method. This method discounts the future cash flows in the present value with the help of the discount rate. There are even other methods to evaluate the project like profitability index method etc.
Capital budgeting helps to take decision in the long run of the business. Any investors who invest in the company see how the company operates or how the company manage to invests its capital in different projects. This also helps the shareholders to gain the confidence in the company. Good decision or the poor decision both are evaluation for far reaching prospect. Therefore capital budgeting is a very important tool in decision making process. It is not that only the big companies use capital budgeting, rather it is the decision process which can be used both by the small companies and big companies.
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Tutors here will provide you accurate information on importance of capital budgeting in decision making process, investments, economic evaluation, pros and cons of different methods involved in capital budgeting, internal rate of return and much more. All these topics are important part of your homework in capital budgeting, so you can select capital budgeting homework help offered by urgetnhomework.com to get the assistance of field specific professionals.
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