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Capital BudgetingModern finance manager function is efficient allocation of capital among available investments.

Fixed AssetsFixed asset are those asset which are permanent in nature and used by firm in normal operations.Fixed assets are of two types.

Capital budgetingCapital budgeting is defined as the firms decision to invest in current funds more efficiently in long term asset in anticipation of expected flow of benefits over the series of years.CB is the process of identifying, analyzing and selecting investment proposals whose returns(cash flows) are expected beyond one year.

Importance of Capital budgeting Growth More RiskyHuge investment Irreversibility Effect on other projects. Difficult decisions.

Limitations/ Difficulties Capital budgetingMeasurement Problem Uncertainty Temporal spread.

Classification of Projects New Projects Expansion Projects Diversification Projects Replacement or modernization Projects R/ D Projects Miscellaneous Projects

Capital budgeting can also be classified in following ways Accept- Reject Decision Mutually exclusive investments Capital rationing decision Contingent investments

Techniques of evaluation of Capital budgeting

Project evaluation techniques Traditional or non discounted cash flowDiscounted cash flowPay back period ARRNet Present valueProfitability Index Internal rate of return Performa of Cash flow after TaxSalesLess variable costContributionLess fixed cost Earning before deprecation and taxes (EBDT)Less depreciation Earning before taxLess taxEarning after taxAdd Depreciation Cash flow after tax CFAT

Capital budgetingPBP