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Question 1: Define the ca
Question 1:
Define the capital budgeting and state the importance of capital budgeting.
Answe
Answe
Answer 4
Answer 4
a. Payback Period. 
b.Discounted Payment Period. c.Net Present Value. 
d.Proﬁtability Index. 
e.Internal Rate of Return.
f.Modiﬁed Internal Rate of Return.
3d
3d

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Question 1:
Define the capital budgeting and state the importance of capital budgeting.

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a. Payback Period.
b.Discounted Payment Period. c.Net Present Value.
d.Proﬁtability Index.
e.Internal Rate of Return.
f.Modiﬁed Internal Rate of Return.

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Capital budgeting requires the projection of cash inflow and outflow of the future. The future in always uncertain, estimate of demand, production, selling price, cost etc., cannot be exact. For example: The product at any time it become obsolete therefore, the future in unexpected. The following methods for considering the accounting of risk in capital budgeting. Various evaluation methods are used for risk and uncertainty in capital budgeting are as follows:
(i) Risk-adjusted cut off rate (or method of varying discount rate)
(ii) Certainly equivalent method.
(iii) Sensitivity technique.
(iv) Probability technique
(v) Standard deviation method.
(vi) Co-efficient of variation method.
(vii) Decision tree analysis

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(A) Traditional methods (or Non-discount methods)
(i) Pay-back Period Methods
(ii) Post Pay-back Methods
(iii) Accounts Rate of Return
B) Modern methods (or Discount methods)
(i) Net Present Value Method
(ii) Internal Rate of Return Method
(iii) Profitability Index Method

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Self-Test Questions (Capital Budgeting)

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Question 1:
Define the capital budgeting and state the importance of capital budgeting.

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Question 2:
Identify the basic steps of conducting capital budgeting analysis.

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Capital budgeting is concerned with the allocation of the firm’s source financial resources among the available opportunities. The consideration of investment opportunities involves the comparison of the expected future streams of earnings from a project with the immediate and subsequent streams of earning from a project, with the immediate and subsequent streams of expenditure”.
1. Huge investments: Capital budgeting requires huge investments of funds, but the available funds are limited, therefore the firm before investing projects, plan are control its capital expenditure.
2. Long-term: Capital expenditure is long-term in nature or permanent in nature. Therefore financial risks involved in the investment decision are more. If higher risks are involved, it needs careful planning of capital budgeting.
3. Irreversible: The capital investment decisions are irreversible, are not changed back. Once the decision is taken for purchasing a permanent asset, it is very difficult to dispose off those assets without involving huge losses.
4. Long-term effect: Capital budgeting not only reduces the cost but also increases the revenue in long-term and will bring significant changes in the profit of the company by avoiding over or more investment or under investment. Over investments leads to be unable to utilize assets or over utilization of fixed assets. Therefore before making the investment, it is required carefully planning and analysis of the project thoroughly.

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Question 3:
Briefly explain on the approaches / techniques that the firms can use to adjust project assessment for risks.

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Question 4:
List three (3) types of quantitative tecniques for capital budgeting decision.

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Question 5:
Discuss four (4) factors which can be incorporated into the capital budgeting analysis.