Capital budgeting is defined as the process through which the business organizations determine the purchase of the fixed assets and carry out the decision making related to it. Capital budgeting process is often used by the organizations for obtaining a qualitative understanding of the investments in the fixed assets and availing a rational basis for judgment. All the potential major projects of the business organizations are evaluated through the process of capital budgeting. Because of its significance in the business world, capital budgeting has become a core part of the study of finance and accounting. The understanding of capital budgeting process allows the individuals to evaluate the cost of capital, cash flows and project life.
There are several different capital budgeting techniques and most common techniques among these include:
In this technique, the entity calculates the time period required to earn the initial investment of the project or investment. The project or investment with the shortest duration is opted for.
The net present value is calculated by taking the difference between the present value of cash inflows and the present value of cash outflows over a period of time. The investment with a positive NPV will be considered. In case there are multiple projects, the project with a higher NPV is more likely to be selected.
- Accounting Rate of Return
In this technique, the total net income of the investment is divided by the initial or average investment to derive at the most profitable investment.
- Internal Rate of Return (IRR)
For NPV computation a discount rate is used. IRR is the rate at which the NPV becomes zero. The project with higher IRR is usually selected.
Because of the inherent complexity in implementation of the capital budgeting tools, there are very few skilled professionals who are assigned the responsibility of carrying out capital investment appraisal. This makes the prospects of any individual pursuing a course in capital budgeting very bright. However, the numerous deadlines and strict instructions provided by the professor for completing the capital budgeting assignment can make it very tiring for the students to present authentic, unique and elaborate work by themselves. Assignment work help has a well-versed team of writing professionals who have years of experience dealing in the subjects related to finance and accounts. We are here to help the students who are struggling with capital budgeting assignments by offering them the required assistance in understanding the topic and also fulfilling all their academic commitments. Contact us today to get help for your capital budgeting assignments.
