This document discusses capital budgeting, which involves making investment decisions in long-term projects or fixed assets. It explains that capital budgeting involves assigning values to the different components and costs/benefits of a project, assessing the initial investment costs as well as expected revenues and profits over time. The document contrasts traditional capital budgeting methods like payback period and average rate of return with discounted cash flow methods like net present value, internal rate of return, and profitability index, which take into account the time value of money.

2.  Investment
in long term projects/ Fixed
assets
(Capital Budgeting)
 Investment
in short term assets (Working
Capital Management)
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3. A
task/ an undertaking, especially one
involving considerable amount of input and
output. Inputs-money, labour and
equipments. Output – its production
 Every project has different components/
activities
 Completion period is relatively long
 Relatively it is a large or major task
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4.  Assign
value to different components/ steps
of project
 Assessing cost and benefits of the project
 All possible cost/ benefits items need to be
identified
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5. Cost
 Initial investment
 Working capital
investment
 Additional
investment
Benefits
 Annual revenue/
profit
 Salvage / scrap
value
 Realization of
working capital
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6.  Comparatively
high investment
 Long run nature
 High risk
 Irreversible nature
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7.  New
projects
 Replacement
projects
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8.  Traditional
methods
Pay Back Period (PBP)
Average Rate of Return (ARR)
 Discounting
methods
Net Present Value (NPV)
Internal Rate of Return (IRR)
Profitability Index (PI)
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9.  Present
value of future cash flows
 Discount by taking cost of capital
 Average cost of capital can be applied
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10.  Incremental
cash flow concept can be
applied
Followings to be calculated
- incremental investment
- cash savings due to operating efficiency
- Tax savings due to changes of depreciation
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