Name and discuss decision problems and decision rules in capital budgeting

If the capital structure is able to minimise the risk and raise the profitability then the market prices of the shares will go up maximising the wealth of shareholders. Type # 3. Dividend Decision: The third major financial decision relates to the disbursement of profits back to investors who supplied capital to the firm.

(a) Capital budgeting has long-term implications: The most significant reason for which capital budgeting decisions are taken is that it has long-term implications, i.e. its effects will extend into the future, and will have to be endured for a longer period than the consequences of current operating expenditure.

Capital budgeting is used to ascertain the requirements of the long-term investments of a company.Examples of long-term investments are those required for replacement of equipments and machinery, purchase of new equipments and machinery, new products, and new business premises or factory buildings, as well as those required for R&D plans.The different techniques used for capital budgeting include: Oct 29, 2015 · Problems and Difficulties in Capital Budgeting. The problem in capital budgeting decisions may be as follows: Future uncertainty: all capital budgeting decisions involve long term which is uncertain. Even if every care is taken and the project is evaluated every minute detail, still 100% correct and certain forecast is not possible.

Since it involves buying expensive assets for long-term use, capital budgeting decisions may have a role to play in the future success of the company. The right decisions made by the process of capital budgeting will help the manager and the company to maximize the shareholder value which is the primary goal of any business. Oct 29, 2015 · Problems and Difficulties in Capital Budgeting. The problem in capital budgeting decisions may be as follows: Future uncertainty: all capital budgeting decisions involve long term which is uncertain. Even if every care is taken and the project is evaluated every minute detail, still 100% correct and certain forecast is not possible. Advantage and disadvantages of the different capital budgeting techniques Prepared by Pamela Peterson-Drake, Florida Atlantic University Payback Period Advantages Disadvantages 1. Simple to compute 2. Provides some information on the risk of the investment 3. Provides a crude measure of liquidity 1. No concrete decision criteria to indicate