1. Capital Budgeting

2. Meaning
“Capital budgeting is the process of
evaluating and selecting long-term
investments that are consistent with the goal
of shareholders wealth maximization. It is
budget for major capital, or investment,
expenditures”.

3. Features
 Potentially large anticipated benefits
 A relatively high degree of risk
 A relatively long time period between the
initial outlay and anticipated returns

4. Types of capital budgeting decision
 New machinery, new plants, new products,
 Replacement
 Expansion
 Diversification and
 Research development projects

5. Classification of investment
 Mutually exclusive
 Independent investment

6. Process of capital budgeting
 Project Generation
 Project Evaluation
 Project Selection
 Project Execution
 Follow-up

7. Significance of capital budgeting
 Long term Implication
 Large amount of funds
 Most critical and difficult decision
 It is not Reversible

8. Capital Budgeting Techniques
 Payback Period
Expected number of years required to recover a project’s
cost.
Payback period = E + B
C
Where:
E = No. of years immediately preceding the year of recovery
B = Balance amount of investments to be recovered
C = Saving during the year of final recovery

9. Cont……
Limitations of Payback:
 Ignores the time value of money. This
weakness is eliminated with the discounted
payback method.
 Ignores cash flows occurring after the
payback period

10. Cont……..
 Average Rate of return
 Net present value
 Internal Rate of Return

11. Thank you