Session Objectives:

Characteristics of Capital budgeting decisions Procedure involved in Capital budgeting decisions Types of project appraisal Determination of Costs and benefits associated with a project

Appraisal Criteria using the time value of money concept -Net Present Value -Internal Rate of Return -Profit Ability Index -Net Benefit Cost Ratio -Annual Capital Charge Capital budgeting decisions Capital budgeting decisions are decisions related to investment in long-term assets in anticipation of an expected flow of benefits over some years. Analysis of such decisions is important due to the following reasons:

a. b. c.

They have a long-term impact on the companys risk-return profile. Such decisions involve huge cash outflows They are generally irreversible in nature.

Capital budgeting decisions should be cautiously made in situations where there is more than one viable project. In such situations, the finance manager needs to evaluate each investment opportunity in terms of its costs and benefits and the uncertainty associated with it. TYPES OF PROJECT APPRAISAL:

There are different types of appraisals that are done for a project: 1. Market Appraisal: It aims at determining/forecasting the total market demand for the product and the market share that the product or service will occupy. To evaluate these aspects, different factors such as past and present trends of demand and supply, degree of competition, price elasticity of demand, cross elasticity of demand with respect to the substitutes and complimentary products, needs of the consumers and restrictions pertaining to the factors of production etc, should be analyzed.

2.

Technical Appraisal: It aims at analyzing the technical aspects of the project. The activities that come under this kind of appraisal are to ensure availability of required quality and quantity of raw materials, other requirements like power, water etc, suitable plant design and layout and required technology, optimal scale of operations etc.