Features of capital budgeting

Wrong decision under this head may effect future earnings, employment capacity, quantity and quality of production. A detailed procedure for periodical reports and tracking the project for the lifetime needs to be streamlined in the initial phase itself.

It is also not correct to assume that mathematically exact techniques always produce highly accurate results. According to I. Time value of-money is not considered b. If investment does not generate anticipated profit, future profitability would be affected.

capital budgeting techniques

Long Term Effect: The effect of the decisions taken today, whether favourable or unfavourable, will be visible in the future or the long term. The above decision could be followed decisions following alternative courses: i. The formula for calculating the payback period of a project is: The shorter is the payback period of the project, the more suitable it is for the company.

The main objective of the firm is to maximize profit either by way of increased revenue or by cost reduction. Profits of all years taken into account.

Post-payback period profitability is ignored totally.

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Capital Budgeting Concept, Nature and Features