Corporate Finance: Traditional Capital Budgeting
Capital Budgeting is the process of planning of long term corporate project related to the investment decision of the organization.
Management use various Capital budgeting techniques to make effective use of these resource to maximize firm’s value (Bennouna, Geoffrey & Marchant 2010). The key objective of an organization is to determine the investment required for expansion of the project, modernize the existing equipment to reduce the costs or to anticipate demand (Bennouna, Geoffrey & Marchant 2010). In order to make further investment, managers determine the payback period and accounting rate of returns of the long term investments (Harrison & John 2010). Though there are several Capital Budgeting Techniques, However this document shall emphasizes on significance and limitation of Traditional Budgeting Techniques (Bennouna, Geoffrey & Marchant 2010). It further comments on the statement that ‘the traditional capital budgeting techniques hold its project passively, it further states that traditional capital budgeting technique does not acknowledge the value management.’
Traditional capital Budgeting
Traditional Capital Budgeting aims to measure the future cash in flows and out flows of the investment, it mainly uses the discounted rate option (Harrison & John 2010). Therefore, it is essential for the management of an organization to consider four main components to value investment opportunities, that is, accounting rate of return, payback period, present value of the project and its real option (Trivedi 2002).