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Capital budgeting
It is the process of making investment decisions in capitalexpenditures. A capital expenditure the benefits of which areexpected to be received over period of time exceeding one year.The followings are some of the examples of capital expenditure1.Cost of acquisition of permanent assests as land & building, plant & machinery, goodwill etc.2.Cost of addition , expansion , improvement or alteration infixed assets3.Cost of replacement of permanent assests.4.Research and development project cost or capital expenditureinvolves non- flexible long – term commitment of funds . Itinvolves the planning & control of capital expenditureAcc to Charles T.Horngreen:-“ Capital Budgeting is long term planning for investing &financing proposed capital outlays”It means capital planning for assets
Need or importance
1.Involves the exchange of current funds benefits to beachieved in future2.The future benefits are expected to be listed over a series of year 3.The funds are invested in non- flexible & term activities4.It has significant effect on the profitability of the concern5.In involves huge funds generally
 
6.They are irreversible decisions7.They are strategic investment decisions
Process of C.B.
Identification of investment proposalsEvaluation of various proposalsFinding priorities & RanksApproval & preparation of capital exp. BudgetsImplementation proposalPerformance review
 Methods of Capital Budgeting 
A)Traditional Methods1)Pay- back period method or payout or pay off method2)Improvement of Traditional Approach to payback period method.3)Rate of Return Method or AccountingmethodB)Time – adjusted Method or discounted method1)Net present value method2)Internal rate of return method3)Profitability Method
 
4)Terminal value methodPay- Back period Method
It is also called as payout or pay off period method represents period in which the total investment in permanent asset pay back itself. Thus it measures the period of time for theoriginal cost of project to be recovered from additionalearning of project itself.The pay- back period can be ascertained in followingmanner:-1)Calculate annual net profit before depreciation & after taxes these are called annual cash inflows.2)Divide initial outlay (cost) of project by the annual cashinflows, where the project generates equal annual cashinflows.Pay back period = Cash outlay of the projectAnnual cash inflows.3)Where the annual cash inflows are unequal the pay back` period can be found by adding up the cash inflows untiltotal is equal to initial cash outlay of project.
Advantages
:The main advantages of this method is that it is simple tounderstand and easy to calculate. It saves in cost, it requireslesser time and labour as compared to other methods of capital budgeting.
Disadvantages of pay-back method
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