Page 127 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances Mahesh Kumar Sarva, Lovely Professional University

Notes Unit 6: Capital Budgeting

CONTENTS
Objectives
Introduction

6.1 Capital Budgeting Characterization
6.2 Capital Budgeting Process
6.3 Methods of Analyze Capital Budgeting Decisions

6.3.1 Traditional Techniques of Evaluation
6.3.2 Discounted Cash Flow Methods
6.4 Comparison – NPV and IRR Methods
6.4.1 Net Present Value vs Profitability Index
6.4.2 Interrelation between Payback, Net Present Value, IRR and Profitability
Index
6.4.3 Concept of Project IRR
6.4.4 Capital Rationing

6.4.5 Break-Even Time and Capital Budgeting for New Products
6.4.6 BET versus the Payback Method
6.5 Financial Data for Sample Problem

6.6 Capital Decision under Risk and Uncertainty
6.7 Conventional Techniques to Handle Risk
6.7.1 Payback
6.7.2 Risk Adjusted Discount Rate Approach (RAD)
6.7.3 Certainty Equivalent Approach

6.8 Summary
6.9 Keywords
6.10 Review Questions

6.11 Further Readings

Objectives

After studying this unit, you will be able to:

 Explain the meaning and process of Capital budgeting;
 Describe the methods of analyzing capital budgeting decisions;

 Define the conception of capital rationing;
 Discuss the capital decision under risk and uncertainty.

122 LOVELY PROFESSIONAL UNIVERSITY