In simple words, capital budgeting is the process of making investment decision in capital expenditure. A capital expenditure may be defined as an expenditure, the benefits of which are expected to be received over a period of time exceeding one year. So in simple language, we can say that a capital expenditure is an expenditure incurred for acquiring or improving the fixed assets, the benefits of which are expected to be received over a number of years in future.
Therefore, the capital budgeting decision involves a current outlay or series of outlay of cash resources in return for an anticipated flow of future benefits. In other words the system of capital budgeting is employed to evaluated expenditure decision which involve current outlay but are likely to produce benefits over a period of time longer than one year.
1. Pay back period : The pay back period is one of the most popular and widely recognized traditional methods of computing investment projects. The payback is called as pay out or pay off period method represent the period in which the total investment in permanent assets pay back itself. In another words, it is defined as the number of years required to recover the original cash outlay invested in a project.
2. Accounting rate of return : It refers to the earning or net net profit after tax. It consider net earning instead of net cash flows. It evaluates the proposal on the basis of net profit, so it is called accounting rate of return.
3. Profitability index : It is also similar with net present value method. It is the refinement of NPV approach because it measures present value of returns per rupee invested. It can be determined by dividing present value of net cash flows by the initial cash outlay.
Therefore, the capital budgeting decision involves a current outlay or series of outlay of cash resources in return for an anticipated flow of future benefits. In other words the system of capital budgeting is employed to evaluated expenditure decision which involve current outlay but are likely to produce benefits over a period of time longer than one year.
1. Pay back period : The pay back period is one of the most popular and widely recognized traditional methods of computing investment projects. The payback is called as pay out or pay off period method represent the period in which the total investment in permanent assets pay back itself. In another words, it is defined as the number of years required to recover the original cash outlay invested in a project.
2. Accounting rate of return : It refers to the earning or net net profit after tax. It consider net earning instead of net cash flows. It evaluates the proposal on the basis of net profit, so it is called accounting rate of return.
3. Profitability index : It is also similar with net present value method. It is the refinement of NPV approach because it measures present value of returns per rupee invested. It can be determined by dividing present value of net cash flows by the initial cash outlay.
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