Capital Budgeting Essay

Answer
'Capital Budgeting'
Step into the shoes of a financial analyst. Discuss which steps of the capital budgeting process you would find the most challenging and state why.
Discuss the pros and cons of applying different investment decision rules when faced with the choice of investing corporate funds. Provide two examples
Capital Budgeting is a process of long range planning involving investment of funds in long term activities whose benefits are expected over series of years. For example, installing machinery, creating additional capacity to manufacture a part of the machinery which at present is purchased from outside. The following are the steps of capital Budgeting
1) Project Planning
2) Project Evaluation
3) Project Selection
4) Project implementation
5) Project Control
As a shoes of financial analyst among the various steps in the capital Budgeting process I would find the project evaluation the most challenging because of the following reasons; * Project Evaluation includes the determination of cash inflows and outflows of various proposals that are available. * Selection of Capital Budgeting Technique because various techniques are available and selecting among the various techniques after taking into account the various pros and cons of each technique * Appraisal of the project using capital budgeting technique.
Suppose there are three projects A, B & C. In the first reason we will evaluate the cash inflows and outflows of the various projects. In the second reason we will select the Capital Budgeting technique such as NPV and in the third reason we will calculate the NPV of the various proposals and select the proposal that will give the positive NPV.
There are various types of investment decision rules;
1) Accounting or Average rate of return
2) Net present value method
3) Internal rate of Return
4) Payback period
5)