Managerial ECONOMICS

GROUP MEMBERS PALLAVI JOSHI 20 MANALI JADHAV 19 GAYATRI PILANKAR 52 ROHAN VICHARE 68 PRAVIN PATIL 49

CAPITAL BUDGETING

INTRODUCTION It is Important aspect of company’s financial management. It is important for “ CASH FLOW and not for PROFIT”. Mainly concerned with financing, dividend & investment Decisions. Also called as Shareholders Wealth Maximization.

DEFINITION “Capital budgeting is the planning process used to determine whether an organization’s long term investment such as new machinery, new plant, new product & research development project are worth perusing. It is the budget of major capital, investment or expenditure.”

Objectives : Consider all relevant cash flows. Discount cash flow using the firm’s opportunity cost of capital. Select the project form a set of mutually exclusive project that maximizes the value of firm. Allow each project to be evaluated independently of all others being considered.

CHARECTERISTICS OF CAPITAL BUDGETING It involves a current & near future outlay of funds called “capital expenditure”. It is non-routine it is non respective. It is discrete with time, financial & technical goals. It is essential for long term phenomenon. It consider flow of benefit to be yield in future.

Maximization of Shareholder value & Capital budgeting Following are the ways useful to categorized Capital Projects : Cost Reduction Output Expansion Expansion by developing new products & Market Government Regulation

Methods of Capital Budgeting In this method the number of years it takes for the net cash flows to equal the cost of projects it define as payback period. Payback Period Method

Discounted Present Value Method Project is measured by taking a discount sum of the stream of net during the expected life time of the project.

Internal rate of return It is the discount rate that equates the present value of the cash flow with the initial investment cost.

Capital Budgeting Process Corporate goal Strategic planning Investment opportunity Preliminary screening Financial appraisal Qualitative factor of project evaluation Accept\ Reject decision Project implementation & monitoring Post Implementation audit

the cost of capital The use of the net present value and internal rate of return method requires future cash flows be discounted by the firm’s cost of the funds used to pay for the cost of project The cost of such fund is referred to the cost of capital The cost capital is the returned required by the investors in the debt and equity securities of the firm

The cost of debt capital There is a little controversy about the cost of capital raised by borrowing from banks or selling bonds that cost is the net or after tax interest rate paid on that debt For a given interest rate (i) and marginal tax rate (t), the after tax cost of debt (d) is given by d= i (1 – t )

Cost of equity capital 1. The risk free rate plus risk premium There are three approaches to estimating the cost or equity 1. The risk free rate plus risk premium 2. Discounted cash flow 3.Capital assets pricing model

Conclusion It is the process of planning capital projects, raising funds & efficient. The demand for capital function shows the amount of capital spending that will be made at each cost of capital. It is a long term planning for making & financing proposed capital outlays. Profitability of different projects is determined by using all the methods which we have seen.

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