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Capital Budgeting. Payback Period. NPV.
Finance & Accounting
Pages 4 (1004 words)
1. Capital Budgeting In corporate financial management, decisions related to capital budgeting are the most important of all decisions. These decisions determine the future course of the organisation. Firms invest their funds in the hope that efficient use of these funds will generate a series of positive cash flows in the future.
Another reason why these decisions are so important is that these decisions involve a large outlay of funds. Therefore, it is necessary that these decisions are taken with due diligence. These decisions cannot be reversed at a low cost. So, any mistake made is very costly to the firm. The capital budgeting process that a manager uses depends on a few factors such as the manager’s level in the organisation and the size of the project and the organization. The following steps are the typical steps followed by most managers. Step One: Generating Ideas Coming up with good investment ideas is the most important step in the capital budgeting process. Good ideas can come from anywhere in the organisation. It can come from managers from any level or from any department in the organisation or even from outside the organisation. Step Two: Analysing Individual Proposals This process involves collecting all the information to forecast the cash flows for each project and evaluating the profitability of each project. Step Three: Planning the Capital Budget Now the company has to organise the projects that are profitable so that they fit within the company’s overall strategy. Step Four: Monitoring and Post-auditing In post-auditing, the actual results are compared with the predicted results and the differences are explained. ...
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