Capital budgeting is one of the most important term you will ever come across while doing financial studies. In the below article, you will learn about the fundamental techniques of capital budgeting that can be used for the better evaluation of the investment project.
Finding a profitable Investment opportunity is still one of the most challenging thing for every business owner. When it is about the hard earned money no entrepreneur can take risks. The capital budgeting is the process used by the organizations to see things from different perspectives. By using its different techniques it becomes easier to evaluate which investment project will bring positive returns. In this article, we will introduce you to the different methods of capital budgeting. Moreover, you can also hire capital budgeting assignment writing help to learn more about it.
List of Popular Capital Budgeting Techniques Used By the Organization
Payback Period
The payback often addressed as payout period is one of the major method of capital budgeting. It can be utilized to determine whether an investment proposal is beneficial or not. This is the traditional capital budgeting methods that is used by the investors calculate the number of years that in which the organization will be able to recover the total investment on the project. There are so many benefits for using payback period method. It is also possible to reduce the risk factor by setting up a short time period for payback check. Here is the accounting formula for the payback period: –
Payback Period = Cash outlay (investment) / Annual cash inflow = C / A.
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Accounting Rate of Return method
Another most important capital budgeting technique is the accounting rate of return. This is used to evaluate the profitability of an investment opportunity. It majorly considers the financial statement to get accurate accounting information for the measurement of project profitability. This is one easy method to implement and can be calculated using the accounting data of the company. However, the process doesn’t consider the overall duration of the project. Check out the formula for the calculation of rate of return is: –
ARR = Average income/Average investment
Net present value method
This the technique of capital budgeting that is used by the investors for evaluating the current cash flows of the investment proposal. This method emphasizes on the time value of the investment opportunity. Along with that its foremost objective is to maximize the welfare of the shareholders. However, it can be complicated to implement sometimes. Here is the accounting formula used for the calculation of the net present value:
These are some of the important methods of capital budgeting. If you need professional help to write assignment on any of these then BookMyEssay is the best academic writing service provider platform. For more details visit the website today!
