We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Types of Capital Budgeting Decisions Essay Sample

essay
The whole doc is available only for registered users OPEN DOC
  • Pages:
  • Word count: 512
  • Category: finance

Get Full Essay

Get access to this section to get all help you need with your essay and educational issues.

Get Access

Types of Capital Budgeting Decisions Essay Sample

Capital budgeting refers to the total process of generating, evaluating, selecting and following up on capital expenditure alternatives. The firm allocates or budgets financial resources to new investment proposals. Basically, the firm may be confronted with three types of capital budgeting decisions i) the accept/reject decision,

ii) the mutually exclusively choice decision and
iii) the capital rationing decision.

i) Asset – reject decision:
This is a fundamental decision in capital budgeting if the project is accepted; the firm would invest in it. In general, all those proposals which yield a rate of return greater than a certain required rate of return or cost of capital are accepted and the rest are rejected. By applying this criterion, all independent projects are accepted. Independent projects are projects that do not compete with one another in such a way that the acceptance of one precludes the possibility of acceptance of another. Under the accept reject decision, all independent projects that satisfy the minimum investment criterion should be implemented.

ii) Mutually exclusive project decisions:
Mutually exclusive projects are those which complete with other projects in such a way that the acceptance of one will exclude the acceptance of the other projects. The alternatives are mutually exclusive and only one may be chosen. Let us imagine that a company is intending to buy new folding machine. There are three competing brands, each with a different initial investment and operating costs. The three machines represent mutually exclusive alternatives, as only one of these can be selected. It may be noted here that the mutually exclusive project decisions are not independent of the accept reject decisions. The project(s) should also be acceptable under the latter decision. In brief, in the example mentioned above, if all the machines are rejected under the accept reject decision, the firm should not buy a new machine. Mutually exclusive investment decisions acquire significance when more than one proposal is acceptable under the accept reject decision. Then, some technique has to be used to determine the best one. The acceptance of this best alternative automatically eliminates the other alternatives.

iii) Capital rationing decision:
In a situation, where the firm has unlimited funds, all independent investment proposals yielding return greater than some predetermined level are accepted. However, this situation does not prevail in most of the business firms in actual practice. They have a fixed capital budget. A large number of investment proposals compete for these limited funds. The firm must, therefore, ration them. The firm allocates funds to projects in a manner that it maximizes long term returns. Thus capital rationing refers to a situation in which a firm has acceptable investments than it can finance. It is concerned with the selection of a group of investment proposal out of many investment proposals acceptable under the accept reject decision. Capital rationing employs reaching of the acceptable investment projects. The projects can be racked on the basis of a predetermined criterion such as the rate of return. The projects are ranked in the descending order of the rate of return

Reference:

http://classof1.com/homework-help/accounting-homework-help/

We can write a custom essay

According to Your Specific Requirements

Order an essay

You May Also Find These Documents Helpful

Studying accountancy and finance

Studying accountancy and finance in the UK universities is a great opportunity for me as they are recognised for having an international excellence in both teaching and research. On top of that, the UK hosts strong accounting and finance professional bodies, which lead the world in terms of the development of accounting standards and drives me wanting to study in the UK. I have always...

Shareholder wealth maximization

Corporate Goals: shareholder wealth maximization. Explain the assumptions and objectives of the shareholder wealth maximization model. Shareholder wealth maximization is considered as a fundamental model that guides the half of the world’s market and corporations. As stated by Eiteman, The Anglo-American markets are of the view that the firms should follow SMW. As discussed in Chapter 4, Shareholder Wealth Maximization model assumes that in order...

Manage budget and financial plan

A budget is an estimation of revenue and expenses over a specified future period of time. It is compiled and re-evaluated on a periodic basis. The master budget is the aggregation of all lower level budget produced by a company's various functional areas and, also includes budgeted financial statement, a cash forecast, and a financing plan. A master budget is the central planning tool that...

The key elements of the financial plan

One of the fundamental tools used in managing account, profit forecasting and pricing strategies is definitely the “break-even analysis”, that can be defined as “a technique for analysing how revenue, expenses and profit vary with changes in sales volume or simply it is the analysis that enables any professional organisation to determine the break-even point”. The “break-even point” or BEP can be considered as “the...

Standard Costing: Meaning and Objectives

“Standard costing” is a traditional cost accounting method and management tool in which “standard costs are employed to value the overall cost of a production”. A “ Standard cost” can be defined as a “predetermined/estimated future cost of performing an operation, producing a good or offering a service”.  As explained in our workbook, using standard costs enable managers to identify in advance material, labor and...

Get Access To The Full Essay
icon
300+
Materials Daily
icon
100,000+ Subjects
2000+ Topics
icon
Free Plagiarism
Checker
icon
All Materials
are Cataloged Well

Sorry, but copying text is forbidden on this website. If you need this or any other sample, we can send it to you via email.

By clicking "SEND", you agree to our terms of service and privacy policy. We'll occasionally send you account related and promo emails.
Sorry, but only registered users have full access

How about getting this access
immediately?

Become a member

Your Answer Is Very Helpful For Us
Thank You A Lot!

logo

Emma Taylor

online

Hi there!
Would you like to get such a paper?
How about getting a customized one?

Couldn't Find What You Looking For?

Get access to our huge knowledge base which is continuously updated

Next Update Will Be About:
14 : 59 : 59
Become a Member