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Financial Management Rupesh Roshan Singh, Lovely Professional University

Notes Unit 9: Capital Budgeting

CONTENTS
Objectives

Introduction
9.1 Capital Budgeting Characterization

9.2 Capital Budgeting Process
9.3 Methods of Analyze Capital Budgeting Decisions

9.3.1 Traditional Techniques of Evaluation
9.3.2 Discounted Cash Flow Methods
9.4 Comparison – NPV and IRR Methods

9.4.1 Net Present Value vs Profitability Index

9.4.2 Interrelation between Payback, Net Present Value, IRR and
Profitability Index

9.4.3 The Concept of Project IRR
9.4.4 Capital Rationing
9.4.5 Break-Even Time and Capital Budgeting for New Products

9.4.6 BET vs. Payback Method

9.5 Financial Data for Sample Problem
9.6 Capital Decision under Risk and Uncertainty
9.7 Conventional Techniques to Handle Risk

9.7.1 Payback
9.7.2 Risk Adjusted Discount Rate Approach (RAD)

9.7.3 Certainty Equivalent Approach
9.7.4 Probability Distribution Approach

9.7.5 Decision–Trees Approach (DT)
9.7.6 Applied Utility Theory

9.8 Statistical Techniques to Handle Risk
9.9 Summary

9.10 Keywords
9.11 Review Questions

9.12 Further Readings

154 LOVELY PROFESSIONAL UNIVERSITY