Patrice Bergeron Stanley Cup Finals jersey

Patrice Bergeron Stanley Cup Finals jersey -

Methods or Techniques of Capital Budgeting

*Dr.P.Shanmukha Rao? **Dr.N.V.S.Suryanarayana

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????????? There are many methods for evaluating the profitability of investment proposals.? The various commonly used methods are:

Traditional methods:

???? (I) Payback period method (P.B.P)

???? (II) Patrice Bergeron Stanley Cup Finals jersey Accounting Rate of return method (A.R.R)

Time Patrice Bergeron Stanley Cup Finals jersey adjusted or discounting techniques:

???? (I) Net Present value method (N.P.V)

???? (II) Internal rate of return method (I.R.R)

???? (III) Profitability index method (P.I)

Techniques of Capital Budgeting

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Traditional Methods?????????????????????????????????????????????? ???????????????????????????????????????????????? Time adjusted methods

Pay back?????????????????????????????????????????????????????????????????????????????????1.N.P.V
Accounting rate of return?????????????????????????????????? ???????????????????? ?2.I.R.R

?????????????????????????????????????? ?????????????? ????????????????????????????? ?????????????????????? 3.P.I

Pay-back period method:

The pay back some times called as payout or pay off period method represents the period in which total investment in permanent assets pay back itself.? This method is based on the principle that every capital expenditure pays itself back with in a certain period out of the additional earnings generated from the capital assets.

Decision rule:

A project is accepted if its payback period is less than the period specific decision rule. A project is accepted if its payback period is less than the period specified by the management and vice-versa.

Pay Back Period

Initial Cash Outflow

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Annual Cash Patrice Bergeron Stanley Cup Finals jersey Inflows

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Advantages:

? Simple to understand and easy to calculate.

? It saves in cost; it requires lesser time and labour as compared to other methods capital budgeting.

? In this method, as a project with a shorter pay back period is preferred to the one having a longer pay back period, it reduces the loss through obsolescence.

? Due to its short-term approach, this method is particularly suited to a firm which has shortage of cash or whose liquidity position is not good.

Disadvantages:

? It does not take into account the cash inflows earned after the pay back period and hence the true profitability of the project cannot be correctly assessed.

? This method ignores the time value of the money and does not consider the magnitude and timing of cash inflows.

? It does not take into account the cost of capital, which is very important in making sound investment decisions.

? It is difficult to determine the minimum acceptable pay back period, which is subjective decision.

? It treats each asset individually in isolation with other assets, which is not feasible in real practice.

Accounting Rate of Return Method

This method takes into account the earnings from the investment over the whole life. It is known as average rate of return method because under this method the concept of accounting profit (NP after tax and depreciation) is used rather than cash inflows.? According to this method, various projects are ranked in order of the rate of earnings or rate of return.

Decision rule