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PPT 2
• Capital Budgeting is the allocation of funds to
different long term projects.
• It is denotes a decision situation where a the lump
sum funds are invested in the initial stages of the
projects and returns are expected over a long
period i.e a period beyond one year.
• It may be to buy land, building, plant etc. or on a
program of R&D, promotional campaign.
• The objective is to select those long term
investment projects which will make the maximum
contribution to the shareholders wealth.
Why capital budgeting decisions are important
Long-term
effects
Irreversible
decision
Problems related to Capital Budgeting Decisions
1 • Future
Uncertainity
2 • Time Element
3 • Measurement
• Types of Capital Budgeting Decisions
Repalcement &
Modernisation
Contingent
Types
Mutually Exclusive
Decision Situation
Accept Reject /
independent
5
Depreciation
Þ Long-term effects Tax Shield
ÞN L=obbkjnnjterm effects
After introducing net working capital changes (NWC)
and capital expenditure we get:
or
Buildings:
Block 1 1. Residential building other than hotels and boarding 5%
houses
Block 2 2, General- Office, factory or buildings which are not 10%
mainly used for residential purpose
3. Temporary Structures
Block3 100%
Add Actual cost of the asset acquired during the PY falling in the XXXX
same block.
Ans.
WDV as on 1.4.12 5,00,000
Add: Actual cost of assets acquired during the PY 2012-13 1,00,000
Less: Moneys payable in respect of assets sold during the
PY 2012-13 (Restricted to 6 lakhs) 2,00,000
WDV for AY 2013-14 (Since block ceases to exist) NIL
• Apply the formulas to get the relevant cash flows from the above
statement and see whether you get the same answer with the different
formulas
• Ans. Rs.1,25,000
• Go to Capital Budgeting PPT 1 from
slide 25