Defined as the analysis of investment alternatives involving cash flows received or paid over time. Capital budgeting slides 6 pdf video for part i of capital budgeting covers slides 116. Capital budgeting is the process of determining which. Capital budgeting a firms business involves capital investments capital budgeting, e. Mirr is a distinct improvement over the regular irr but we need to take note. The term capital budgeting means planning for capital assets. Many finance textbooks suggest that a good capital budgeting decision rule should meet the following criteria. F irst, capital budgeting is very important for corporations.
Capital budgeting is the planning of expenditure and the benefit, which spread over a. In other words, the cost of capital is simply the rate of return the funds used should produce to justify their use within the firm in the light of the wealth maximisation objective. These notes have been specifically designed for this course and are available on the course web site. A project may be rejected by an allequity firm, while the same project might be accepted by an identical firm with leverage. It includes the financial analysis of the various proposals. Chand principles of corporate finance, richard a brealey etal. Capital budgeting techniques, importance and example.
This is the difference between the firms cash flow if the project is undertaken and if its not. Capital budgeting is used for decisions about replacing equipment, leasing or. Hi guys, i am sharing with you this excellent ebook on financial management in pdf format. Chapter 1 preface these notes are intended for the introductory.
To do that, we must convert the cash inflows due at points in time t 1, t 2, t 5 into their socalled presentvalue. The objective is to increase the firms current market value. Budgeting of capital expenditure is an important factor in the management of a. Defined as the analysis of investment alternatives involving cash flows received or. Budgeting of capital expenditure is an important factor in the. The word investment refers to the expenditure which is required to be made in connection with the acquisition and the development of longterm. Alex shapiro 1 lecture notes 9 the capital asset pricing model capm i. Capital budgeting evaluation techniques 112 chapter6. Lecture notes, lectures 5 ch5 operating and financial leverage lecture notes, lectures 6 ch06 working capital and the financing decision lecture notes, lectures 8 ch8 sources of shortterm financing lecture notes, lectures 9 ch 9 the time value of money lecture notes, lectures 10 ch10 valuation and rates of return lecture notes, lectures 16 ch16 longterm debt and lease. Lecture notes 9 the capital asset pricing model capm i. Capital budgeting, steps to capital budgeting, difference between independent and mutually exclusive projects, net present value npv. In the next lecture, we will define npv in a more formal manner, and learn how to calculate it using excel.
Capital budgeting and various techniques of capital budgeting. Unless the project is for social reasons only, if the investment is unprofitable in the long run, it is unwise to invest in it now. Capital budgeting techniques james madison university. Three keys things to remember about capital budgeting decisions include. System upgrade on feb 12th during this period, ecommerce and registration of new users may not be available for up to 12 hours. Capital budgeting, which is also called investment appraisal, is the planning process used to determine which of an organizations long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It involves the decision to invest the current funds for addition, disposition, modification or replacement of fixed assets.
Capital budgeting techniques chapter 11 1 net present value npv. Capital budgeting is a companys formal process used for evaluating potential expenditures or investments that are significant in amount. Budgeting objectives in this lecture you will learn the following introduction. A capital budgeting decision is typically a go or nogo decision on a product, service, facility, or activity of the firm. The large expenditures include the purchase of fixed assets like land and. It is the number of years required to recover the original cash outlay invested in a project. Dr andros gregoriou lecture 2, capital budgeting 1 bs2551 money banking and finance capital budgeting capital budgeting techniques are decision rules used by managers when undertaking investment decisions.
This model is widely used in capital budgeting exercises in practice and is one of the cornerstones of modern finance. Capital budgeting is finance terminology for the process of deciding whether or not to undertake an investment. The examples above illustrated the need for economic agents to substitute income intertemporally. It is the simplest and perhaps, the most widely used quantitative method for appraising capital expenditure decision. It is the approach we have modeled in the diagram shown above. Capital budgeting techniques cash flow estimation risk analysis in capital budgeting optimal capital budget capital budgeting strategic business plan.
The cost of capital is the minimum rate of return required on the investment projects to keep the market value per share unchanged. The opportunity cost of capital is the same for all periods 4. Therefore, our first real step in capital budgeting is to obtain knowledge about the project and organize this knowledge into a decision tree. The pay back period pbp is the traditional method of capital budgeting. I will also share the lecture notes on this subject. The model specifies expected returns for use in capital budgeting, valuation, and regulation. Feb 23, 2012 capital budgeting financial management in hindi ii ca cma cs b. But before we conclude this lecture, let me show you the criteria for good capital budgeting decision rules. We can use software programs such as expert choice or decision pro to help us build a decision tree. Financial managementtext and problems, my khan and pk jain, tata mcgraw hill, financial management, dr. The threshold rate is set equal to opportunity cost. Capital budgeting or capital expenditure management is concerned with planning and control of capital expenditure.
Capital budgeting is used to make the investment decision. The consideration of investment opportunities involves the comparison of the expected future streams of earnings from a project with the immediate and subsequent streams of earnings from a project, with the immediate and. Fundamentals of financial management, chandra bose d, phi financial management, william r. Sep 30, 2010 capital expenditure budget or capital budgeting is a process of making decisions regarding investments in fixed assets which are not meant for sale such as land, building, machinery or furniture. Introduction the value of a firm today is the present value of all its future cash flows. In this article let us talk about the important techniques adopted for capital budgeting along with its importance and example. Finance 402 capital budgeting and corporate objectives. A firms business involves capital investments capital budgeting.
Capital expenditure budget or capital budgeting is a process of making decisions regarding investments in fixed assets which are not meant for sale such as land, building, machinery or furniture. This video lecture presents applications of the npv rule and project financing, as well as alternatives to npv. Lecture notes, lectures 12 ch12 the capital budgeting. Capital budgeting for capital budgeting, you are only concerned with free cash flow fcf associated with the project. There are different methods adopted for capital budgeting. Assume that machine will be depreciated over 10 years using straightline depreciation. The best techniques should satisfy the following criteria.
All the material in the lecture notes is required and you are responsible. Financial management ebook,lecture notes,pdf download for mba. Corporate financial management and modeling corporate financial mgtmodel fina 6274 uploaded by. The task of capital budgeting is to eyeball this cash flow and to determine whether signing on to itby buying the machinewill enrich the firms owners. Capital budgeting is the process most companies use to authorize capital spending on long. We reiterate our excel norma nch 1156 pdf note from chapter 5 p. Financial management ebook,lecture notes,pdf download for. This ebook is highly recommended for mba or management students. The basics capital budgeting, lecture notes financial. Lecture notes, lectures 5 ch5 operating and financial leverage lecture notes, lectures 6 ch06 working capital and the financing decision lecture notes, lectures 8 ch8 sources of shortterm financing lecture notes, lectures 9 ch 9 the time value of money lecture notes, lectures 10 ch10 valuation and rates of return lecture notes, lectures 16 ch16 longterm debt and lease financing. A student applying for student loans is investing in his or her human capital. Capital budgeting is used for decisions about replacing equipment, leasing or buying, and plant acquisitions. Capital budgeting is the pr ocess that companies use for decision making on capital projects projects with a life of a year or more.
In this sense, capital consists of notes, bonds, stock, and shortterm financing. Lecture notes, lectures 12 ch12 the capital budgeting decision. Capital budgeting under risk and uncertainties chapter7. Along with the notes, you will also get the latest question paper of financial management. Introduction to capital budgeting boundless finance. Lecture 2 advanced capital budgeting avik mukherjee classifying. Lecture notes in public budgeting and financial management. Cost concepts management accounting final exam lecture summaries 3 relevant cots lecture notes 3 4 full costing lecture notes 4 5 abc costing lecture notes 5. Because capital is usually limited in its availability, capital projects are individually evaluated using both quantitative analysis and qualitative information. Capital budgeting techniques investment appraisal criteria under certainty can. Decisions on investment, which take time to mature, have to be based on the returns which that investment will make. In our last article, we talked about the basics of capital budgeting, which covered the meaning, features and capital budgeting decisions.