Capital Budgeting Process Posted by admin on 27 February, 2010 3 Comments This item was filled under [ Capital Budgeting

Process, Project Analysis ] Capital Budgeting Process Evaluation of Capital budgeting project involves six steps: First, the cost of that particular project must be known. Second, estimates the expected cash out flows from the project, including residual value of the asset at the end of its useful life. Third, riskiness of the cash flows must be estimated. This requires information about the probability distribution of the cash outflows. Based on project’s riskiness, Management find outs the cost of capital at which the cash out flows should be discounted. Next determine the present value of expected cash flows. Finally, compare the present value of expected cash flows with the required outlay. If the present value of the cash flows is greater than the cost, the project should be taken. Otherwise, it should be rejected. OR If the expected rate of return on the project exceeds its cost of capital, that project is worth taking. Firm’s stock price directly depends how effective are the firm’s capital budgeting procedures. If the firm finds or creates an investment opportunity with a present value higher than its cost of capital, this would effect firms value positively.

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