Page 90 - 5.2 i. Manac Finance ITC Summarised Notes

CAPITAL INVESTMENT APPRAISAL

Capital budgeting

Capital budgeting is;

• Process of planning expenditure on long-term assets with cash flows extending
beyond one year.

• Companies need to forecast cash flows from new investments and ensure that
only investments that increase the value of the company (create shareholder
wealth) are made.

• Companies should ensure that investments are only accepted if they increase
the value of the company.

Methods of ranking projects/ investments:

Basic methods:

• Accounting rate of return
• Payback period
• Discounted payback period
Discounted cash flow methods:

• Net present value method
• Internal rate of return

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