100% OFF- Managing Project With Microsoft Excel

Capital Budgeting come under branch of Financial Management – Investment Decisions.

Capital budgeting is the process a business undertakes to evaluate potential major projects or investments.

Construction of a new plant or a big investment in an outside venture are examples of projects that would require capital budgeting before they are approved or rejected.

Organisation want to undertake project then  two important factors to be considered

Technical Feasibility if Project is not Technical feasible then no point in moving forward

Different capital budgeting methods include the Payback Period,

the accounting rate of return, the net present value, the discounted cash flow, the profitability Index, and the Internal Rate of Return method.

To Check Financial Feasibility we use Different methods /Techniques of capital budgeting

Capital Budgeting is planning process to check  weather project is worth to take or not

1 NPV

2 IRR

3 PI

4 PBP

These methods use the incremental cash flows from each potential investment, or project. Techniques based on accounting earnings and accounting rules are sometimes used – though economists consider this to be improper – such as the accounting rate of return, and “return on investment.” Simplified and hybrid methods are used as well

An example of a project with cash flows which do not conform to this pattern is a loan, consisting of a positive cash flow at the beginning, followed by negative cash flows later. The greater the IRR of the loan, the higher the rate the borrower must pay, so clearly, a lower IRR is preferable in this case. Any such loan with IRR less than the cost of capital has a positive NPV.

Excluding such cases, for investment projects, where the pattern of cash flows is such that the higher the IRR, the higher the NPV, for mutually exclusive projects, the decision rule of taking the project with the highest IRR will maximize the return, but it may select a project with a lower NPV.

In some cases, several solutions to the equation NPV = 0 may exist, meaning there is more than one possible IRR. The IRR exists and is unique if one or more years of net investment (negative cash flow) are followed by years of net revenues. But if the signs of the cash flows change more than once, there may be several IRRs. The IRR equation generally cannot be solved analytically but only via iterations.