Answer to Question #189968 in Management for Prabhdeep Singh

Question

Subject : Project Planning and Control

Discuss the usage and application of capital budgeting techniques.( Please answer in 200 words) 

Answer 1

Usage of Capital budgeting technique

It is used in financial management as a wide scope to enable managers to evaluate different projects.

It can also be used to uncover the risk and vulnerability of different projects.

Used in keeping checks on under or over investments.

Provides the management with an effective control on cost of capital expenditure projects.

Helps in determining the fate of the business on available resourses are used.

Ways of applying capital budgeting techniques

Payback period method- during this period the proposal generates cash to recover the initial investment. Selection is done through calculationg the earning capacity of the project.

Accounting rate of return method- used to ensure compensation of expected profitability of through net earnings. It also helps in calculating rate of returns expressed as a percentage of the earnings of investments in a project.

Discounted cash flow method- it's used to calculate inflow and out flow through the life of an asset which are discounted through a discounting factor.

Net present value method - Cash flow expected at different times is discounted at a particular rate. The present values of cash are compared to the original investment.

Internal rate of return- helps in determining the point at which the present value of investment is at zero.

Profitability index- ratio present value of future cash benefits at the required rate of return to the initial cash outflow of the investment.