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Remarkr
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Capital Budgeting

Modern financial manager’s function involves efficient allocation of capital among available investments.

Investment opportunity may be long-term (or fixed assets) or short-term (current assets). Investment in long-term assets is studied under capital budgeting decision and investment in current assets is studied under working capital management.

Meaning

  • Capital budgeting may be defined as ‘the firm’s decision to invest its funds most efficiently in the long-term assets in anticipation of an expected flow of benefits over a series of years.’
  • Capital budgeting is the process of identifying, analyzing and selecting investment projects whose returns (cash flows) are expected to extend beyond one year.

Fixed Assets

Fixed assets are those assets that are of permanent nature having a life expectancy of more than a year and are used by a firm for its normal operations. These fixed assets are not intended for sale and represent non-liquid form of assets.

Some Useful Formulae

Steps to Calculate Pay-back Period

  1. Write down all the values that are given:
    • Project Cost
    • Annual Profit = EBIT (or EBT, as given in the question)
    • Tax Rate
    • Depreciation Rate
  2. Calculate EAT
  3. (Optional) If Depreciation is already removed, add it. This will give CFAT (Cash Flow After Tax)
  4. Put the values in the formula and calculate the answer.