CAPITAL BUDGETING – Making long-term investment decisions. It requires multiple accounting period.

It also includes:

 Acquisition of long term equipment

 Research and Development spending

NET INVESTMENT CALCULATION:

 This is the net cash outflow at year zero (0).
 This initial pay-out “now” made in the expectation that it will provide future benefits.

SAMPLE CASE:
ANSWER:

Please note that 226,500 is a Net outflow of investment in Year 0, which is the starting point.

QUESTION: HOW TO EVALUATE LONG TERM PROJECT?

ANSWER: CASHFLOW

Sample Case
ASSUMING NO TAX INVLOVE: ASSUMING WITH 30% SUBJECT TO TAX