Q4

There are several criteria used to generate Capital Budgets. How can they all
be used for the same project, in order to arrive at the best solution?
What is needed is a thorough understanding & evaluation of the methods, then
using their relative strengths & weaknesses to arrive at the best solution.
The answer must reflect individual bias. Please, what is not needed is the
regurtitaion of whats in the book.

Capital budgeting is the process most companies use to authorize capital spending on long
term projects and on other projects requiring significant investments of capital. Because
capital is usually limited in its availability, capital projects are individually evaluated using
both quantitative analysis and qualitative information. Most capital budgeting analysis uses
cash inflows and cash outflows rather than net income calculated using the accrual basis.
This is the planning process used to determine which of an organization's long term
investments are worth pursuing.
Replacement decision is weather to purchase capital assets to take place the existing assets
which is absolute in order to maintain the flow of the operation
Expansion decision is weather to purchase capital assets (project) and add them to existing
assets so as to increase the existing operations. Replacement decision is weather to
purchase capital assets to take place the existing assets which is absolute in order to
maintain the flow of the operation
Expansion decision is weather to purchase capital assets (project) and add them to
existing assets so as to increase the existing operations.
There are several methods of capital budgeting techniques such as :
1. Payback Period
2. Net Present Value (NPV)
3. Internal Rate of Return (IRR)
Payback Period
The payback measures the length of time it takes a company to recover in cash its initial
investment. This concept can also be explained as the length of time it takes the project to
generate cash equal to the investment and pay the company back.

Net Present Value (NPV)
Net Present Value, or NPV, combines two concepts of value. First, it determines how much
cash will flow in as a result of the investment, and compares that against the cash that will
flow out in order to make the investment.
Multiple Budgeting
Most companies use multiple techniques for all of their capital budgeting decisions. There are
a number of minor methods, such as profitability index and sensitivity analysis, which can
also be employed in making decisions. Since each method looks at the investment from a
different perspective, it is best to employ multiple analyses and take the opportunities with
the best return according to all techniques.
As stated above there are so many criteria to generate Capital Budgets.
Since Investment decisions are dealing with considerable risk element, using one of
the method (E.g NPV only )to generate the capital budget might be end up with soft
estimate
Hence firms may tend choose multiple criteria by avoiding each methods
disadvantages for evaluation a project.
o Suzette Viviers, Howard Cohen, (2011) "Perspectives on capital budgeting in
the South African motor manufacturing industry", Meditari Accountancy
Research, Vol. 19 Iss: 1/2, pp.75 93 indicates The net present value
(NPV) and internal rate of return criteria are the two most popular
appraisals methods used in practice. Most respondents used multiple
criteria before making substantial capital investments. These findings
conform to contemporary capital budgeting theory