Problem 1 The cost of a project is $50,000 and it generates cash inflows of $20,000, $15,000, $25,000 and $10,000 in four years. Using present value index method, appraise profitability of the proposed investment assuming a 10% rate of discount. Solution Calculation of present value and profitability index Year Cash Inflows Present Value Factor Present …
Capital expenditure means purchase of fixed Assets which are not for sale but for addition to profits. Capital budgeting is the planning of expenditure whose benefit will be for many future years. The main exercise involved in capital budgeting is to maximize business profits.
Capital budgeting generally refers to acquiring inputs with long run-returns. In other words, it is long term planning for making and financing proposed capital outlay. It is a scheme of ranking various proposals by measuring their profitability.
It is key function of financial management. The Capital budgeting requires huge investment, long term impact on profitability, and wealth maximization are same of the examples of its contribution to management and shareholders. The present chapter makes an attempt to explain its wide range uitility.