Instructions Answer the following questions The answer must

Instructions: .Answer the following questions The answer must be between 3 to 5 pages Questions: Q: Critically examine the various capital budgeting techniques used by the various corporates 10 Marks

Solution

Capital Budgeting refers to the decision of long term investments of the company involving huge money. hence, the decision should be taken very carefully.

Techniques of Capital Budgeting:

1. Payback period method: It refers to the number of years in which the initial investment is recovered. Lower the better

2. Dscounted Payback period methos: Future Cash flows are discounted and then the payback period is arrived at. More logical approach since it takes into account the time value of money

3.Net Present Value Method: Widely used method. NPV = present value of cash inflows - present value of cash outflows. Positive NPV reflects profitable investment

4.Profitability Index = Present Value of Cash Inflows/Present Value of Cash Outflows. It it is greater than 1, the project is acceptable.