Capital Budgeting Planning And Controlling Capital Expenditure Essay

Capital Budgeting Planning And Controlling Capital Expenditure Essay

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Capital Budgeting (also known as investment appraisal) is the most important tool in corporate finance to determine whether a company’s long term investments are worthwhile or not. It is also known as investment a Working capital are the funds necessary to support the operation of the long-lived assets. Various examples will be used to illustrate Capital Budgeting process is the process of planning and controlling capital expenditure within a firm. Capital Budgeting is over a period greater than the period considered under an operating budget. Capital budgeting involves the search for suitable investment opportunities; example (such as investing in R&D, opening a new branch, replacing a machine) are worth pursuing and that adequate cash is available when required for investments. Evaluating particular investment projects; raising long-term capital to finance investments; assessing the cost of capital; applying suitable expenditure controls to ensure that investment outlays conform to techniques such as internal rate of return, net present value, and payback period are employed in creating a capital budget is the process by which a company determines whether projects are worth pursuing and or it increases the value of the company.
The Capital Budgeting Process consists of; generating ideals, is the most important process this can be done in or outside the company. Analyzing individual proposals by collecting vital information for forecasting cash flow and evaluating the project potential profits. Planning the capital budget analyze the financial and resource constraints planning will see what fits the proposed projects company’s strategies. Monitoring and post auditing will compare the results and explain the differences. This hel...


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...esent value of the future cash flows of an investment with the initial investment. It is one of the several measures used for investment appraisal.
Decision Rule
A project should only be accepted if its IRR is NOT less than the target internal rate of return. When comparing two or more mutually exclusive projects, the project having highest value of IRR should be accepted.
IRR Calculation
The calculation of IRR is a bit complex than other capital budgeting techniques. We know that at IRR, Net Present Value (NPV) is zero, thus:
NPV = 0; or
PV of future cash flows − Initial Investment = 0; or
CF1 + CF2 + CF3 + ... − Initial Investment = 0
( 1 + r )1 ( 1 + r )2 ( 1 + r )3
Where,
r is the internal rate of return;
CF1 is the period one net cash inflow;
CF2 is the period two net cash inflow,
CF3 is the period three net cash inflow, and so on ...

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