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Capital Budgeting Analysis: Financial Policy and Planning MB 29
Capital Budgeting Analysis: Financial Policy and Planning MB 29
Outline
Meaning of Capital Budgeting Significance of Capital Budgeting Analysis Traditional Capital Budgeting Techniques
Payback Period Approach Discounted Payback Period Approach Discounted Cash Flow Techniques
Net Present Value Internal Rate of Return Profitability Index Net Present Value versus Internal Rate of Return
Involve massive investment of resources Are not easily reversible Have long-term implications for the firm Involve uncertainty and risk for the firm
Due to the above factors, capital budgeting decisions become critical and must be evaluated very carefully. Any firm that does not follow the capital budgeting process will not be maximizing shareholder wealth and management will not be acting in the best interests of shareholders. RJR Nabiscos smokeless cigarette project example Similarly, Euro-Disney, Concorde Plane, Saturn of GM all faced problems due to bad capital budgeting, while Intel became global leader due to sound capital budgeting decisions in 1990s.