Capital Budgeting

Posted: November 13, 2010 in Engineering Economics

What is capital budgeting?

• Analysis of potential projects.

• Deciding which one is more important

• Adds to the firm value

 

Importance of capital budgeting

• Strategic direction

• Long term decision and effects last long time

• It might have serious financial consequences

 

Capital budgeting success

• Flow of ideas

• Proper incentive

• Screening

• Selection by priority

 

Does all projects require capital budgeting?

• Cost of capital budgeting should be considered

• Simple or complicated decisions

• Value of investment to the firm

 

Independent & mutually exclusive projects?

Projects are independent, if the cash flows of one are unaffected by the acceptance of the other. Mutually exclusive, if the cash flows of one can be adversely impacted by the acceptance of the other.

 

Capital budgeting decision rules

• Payback period

• Discounted payback period

• NPV

• IRR

• MIRR

• Profitability index

 

What is the payback period?

The number of years required to recover a project’s cost, or how long does it take to get the business’s money back?

 

Quote

Managerial Finance, Hussain A. Al Awami, B.Sc. Pharm., M.Sc., MBA

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