Understanding the Major Techniques Used In Capital Budgeting

Capital Budgeting is the process used by business organizations for determining, evaluating and analyzing potential expenditure. It also investigates the investment opportunities that are significant for the business. This article shares elaborated details about various techniques of capital budgeting used by the companies.

Every company’s survival depends upon the management efficiency to find profitable investment opportunities. One cannot expect the growth of the business without making beneficial investments. The businesses must select the right opportunities or projects to maximize the return. The students who are learning capital budgeting should learn the proper use of its techniques. If you are not good with these techniques then you can hire capital budgeting assignment help from the experts of BookMyEssay. However, here we would discuss brief information about some popular capital budgeting techniques.

Capital Budgeting Techniques

Payback period: The payback period is one of the traditional methods of capital budgeting. This technique represents the time period in which the total investment made in the permanent assets is paid back. The firm often finds the investment opportunities in which capital invested can be recovered as soon as possible. The payback period method can be implied in the following manner:

• By calculating annual net profits before the depreciation and taxes are called annual cash flows.
• Dividing the cost of the particular project by the annual cash inflow, one can generate annual cash inflows from the project.

Therefore it has one simple formula to calculate the time period:

Payback Period = Original Investment/ Annual Cash Flow

Rate of return method: It is often addressed as the average rate of return or accounting rate of return method. This is used for measuring the return on the particular opportunity with regard to the money need for that. The formula used to calculate the rate of return is mentioned below:

Rate of return = average annual profit (After tax) x 100 / Average of the investment

Time-adjusted or discounted cash flow method: This technique is different than the traditional methods of capital budgeting. The payback period and ARR are not considered as reliable approaches for the process. These methods used to ignore the time value of money. But if we talk about the time-adjusted and discounted cash flow method then it solely concentrates on the time value of money. These are even addressed as the present value techniques that deliver good evaluation results.

These are some of the methods of capital budgeting. There is no doubt in the fact that using these methods practically can be a little difficult. This is why students should focus on understanding these techniques completely. If you have any doubts then you can take help from the expert academic writers of the BookMyEssay. You can also buy dissertation writing services from this company.

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