CAPITAL BUDGETING Capital Budgeting involves a current investment in which the benefits are expected to be received beyond one

year in the futureJames Van Horne. Features of Capital Budgeting; 1) 2) 3) 4) 5) It entails huge investment. The decision is irreversible. Forecasting of future cash flows. Benefits likely to accrue beyond one year. Greater uncertainity. Investment proposals can be classified as a)Independent projects b)Dependent projects c)Mutually exclusive projects. The various steps in capital budgeting decision are 1) Generation of idea 2) Estimation of cash flows 3) Evaluation of cash flows 4) Selection of projects. The capital expenditure can be for Expansion , Replacement or for non profit projects like firefighting , exhaust fans etc. EVALUATION OF PROJECTS; There are several methods for evaluation. DCF and non DCF methods. The non DCF methods are 1)ARR (average rate of return) 2) ROI (Return on investment ) 3)Pay back method. DCF Methods are as follows; 1) 2) 3) 4) NPV (Net Present Value Method) IRR (Internal Rate of Return) PI(Profitability Index /BCR Benefit Cost Ratio ) Discounted Pay Back Period.