Capital Budgeting Techniques
- Used to choose between various projects.
- A capital project involves capital outflow( investment) and capital inflows(net profit) over the life of the project.
- PV of all cash inflows will be +ve and PV of all cash outflows will be negative.PV will depend on the discount rate( cost of capital)
- Summation of all the PVs of cash inflows and outflows is called Net Present Value(NPV)
- IRR is that discount rate at which NPV of a project is zero.
- Other method used for capital budgeting is pay back period method.
Decision Making – to acquire or not to acquire the capital goods.