Capital budgeting important problems and solutions

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 …

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Capital budgeting evaluation methods/techniques

The techniques/methods of evaluation of capital budgeting proposals are as under: (i) Degree of urgency method. (ii) Pay-back period method. (iii) Unadjusted rate of return method. (iv) Present value method. (a) Time Adjusted Rate of Return method. (b) Net present value method. 1. Urgency Method As a matter of fact, urgency method does not suggest …

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Capital Budgeting

Capital budgeting tries to determine the capital investment requirements of the business, e.g., acquisition of machinery, building, etc. The plans of the business to modernize or go in for additions of long-term investment will influence the cash budget in the current year. Therefore, capital expenditure decisions must be anticipated in advance and integrated into the …

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