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Capital budgeting the term refers to - ‘Capital’ which implies the fixed assets and ‘Budget’ which implies the planning of the expenses. Capital budgeting is the process of evaluating, contemplating and determining a large number of expenses that are potential.  Such expenditures are often the investment made in long term ventures, purchase of a new vehicle for the use of company or factory, purchase of new machinery and equipment, the building of a new plant and many more. The future accounting profit of any project is calculated and estimated by the capital budget. Capital budgeting also maximizes the chances of a company’s future profits. The management of any company uses capital budgeting as the means of predicting which project would yield the most profit within the expected time. When any new machinery is purchased it is considered to be a capital asset.

The capital budgeting is also referred to as the process in which a firm makes its decisions regarding the buying of major fixed assets. The firms decide on investing in the modification, displacement, addition, and disposition of those fixed assets. Students who are pursuing capital budgeting go through a lot of difficulties in getting through their academic years since capital budgeting needs a lot of hard work and many hours of study.  Hence, they look for capital budgeting assignment help and capital budgeting homework help online.

What are Capital Budgeting Decisions and its Kinds? 

Capital budgeting operates using many processes such as evaluation, selection, generation and the following of the alternatives of capital expenditure. There are three kinds of capital budgeting decisions, accept-reject decision, mutually exclusive project decision and capital rationing decision.

  1. Accept-Reject Decision - The first out of the three kinds of capital budgeting is the Accept-reject decision. The investment decisions which generate more return than the capital cost are always acceptable whereas the decisions of investment which generate less return than the capital cost are rejected. Hence, firms make investments only if the decisions are acceptable.
  1. Mutually Exclusive Project Decision - The second out of the three kinds of capital budgeting is the mutually exclusive project decision. This type of decision competes with each other which imply that when one alternative is accepted, another is automatically rejected.
  1. Capital Rationing Decision - The third out of the three kinds of capital budgeting refers to the process of keeping restrictions to the number of new projects or investments that the company has undertaken.

What is the Importance of Capital Budgeting?

For knowing what is capital budgeting one needs to understand the importance of capital budgeting simultaneously. As discussed earlier, capital budgeting is the process that works step by step and is used by companies to conclude or determine the advantages of an investment project. Capital budgeting is also a way of creating measurability and accountability. A company which is investing its resources in a particular project must have an idea of the returns and risks involved in it. The capital budget process works to determine the financial profitability of any project or investment in the long run.

The importance of capital budgeting also helps in looking after various aspects such as seeking new projects to invest their resources on, generate new goals which will work in the betterment of the company, approximate the calculation of cash flows, create decisions, control and monitor expenditures and a lot of other aspects.   

What are the Different Capital Budgeting Techniques?

There are various Capital Budgeting techniques that are used by businesses, but the most useful of all are the Payback Period Method and the ARR method (Accounting rate of return method).

Payback Period Method

The payback period refers to the period of time that is required in order to regain the cost of an investment. The payback period method is among the most simple methods for the common people to understand who do not have even the basic idea of this field. The method of payback period is usually expressed in years which imply the period of time in years that is taken for paying back the initial investment of a capital project.

ARR Method (Accounting Rate of Return Method)

ARR method stands for Accounting rate of return. The amount of profit that is expected by an individual based on the investment that he or she has made. Simple rate of return is another name for the Accounting rate of return. Calculation of Accounting rate of return is made through the division of the initial investment of a project by average annual accounting profit.

What are the Problems in Capital Budgeting?

  • Time Element - The problem of time element refers to the occurrence of cost and benefit of a decision at different points of time. It requires to be adjustable for the time value of money in order to be comparable. The chances of uncertainty increase when the time period is longer.

  • Future Uncertainty - The capital budgeting decisions are long term which means they are uncertain. An accurate forecast is not possible even after special efforts and hard work. The uncertainty takes place relating to various factors such as demand in the future, cost of the project, competition and many more.  

What are the Different Capital Budget Processes?

As discussed earlier, capital budgeting is the process that is used by companies to evaluate, calculate or estimate the potential expenditures that are of a huge significance in terms of the amount. Some of the capital budget processes are:

  • Project Screening and Evaluation - The project screening and evaluation process refers to the selection of the correct criteria that is required to judge the value of any proposal. This method of the capital budget process has to match the objective of the firms so that the market value can be escalated.
  • Project Selection - Since different businesses have different requirements hence, there is not a defined method. Therefore, the approval of a project has to be done that is based on the criteria of the selection and the screening process that is meant for every firm.  
  • Project Identification and Generation - Project identification and generation is the most important capital budget process. This process helps to generate a proposal for investments since there can be different and various reasons and considerations in business for taking up investments.

What are the Limitations of Capital Budgeting?

Capital budgeting determines every possible positive sides and merit of investment, although there are several limitations in the capital budgeting as well like the cash flow, time horizon, time value, discount rates, and others due to which companies do not always succeed in making good decisions.

Students pursuing capital budgeting very often find difficulties in getting through their tasks that are assigned by their teachers or professors. Hence, they look for capital budgeting assignment help and capital budgeting homework help from various sources. Need Assignment Help is the best source among all as it has writers who are with a Ph.D. and master’s degree.

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Why NeedAssignmentHelp?

NeedAssignmentHelp is the one-stop solution for all the queries and doubts of students pursuing finance and capital budgeting. Since the students cannot always figure the capital budgeting techniques and the kinds of capital budgeting out, they look for someone to provide them with capital budgeting assignment help and capital budgeting homework help by online academic work providing websites. This is where the NeedAssignmentHelp can prove to be of great relief.

Our writers have years of experience in this field and have been very successful in catering to the best quality assignment help and homework help services. We have our online executives available 24*7 to attend to the queries of the students at any hour and any time they need. We have been offering assignment help and homework help not only in capital budgeting but various other subjects as well.   

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