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Capital budgeting
The capital budgeting is conducted irregularly as the case arises. It comprises all calculable aspects, which enable a more rational assessment of an investment. It is differentiated between two groups of methods for capital budgeting: dynamic and static procedures. Amongst others, the groups differ in that in the dynamic procedure, the payments prevail as calculation element, whereas by the static procedure, costs and performance or expenses and proceeds are used as calculation elements. In detail, the groups include the following methods of capital budgeting:
Dynamic Procedure
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Static Procedure
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Net present value method
Discounted cash flow method
Annuity method
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Comparative cost method
Profit comparison method
Payback period rule
Investment appraisal
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The use of the different procedure often depends on the kind of investment, the difficulties in decisions and the available resources. If necessary, a combination of both procedures can be carried out.
The capital budgeting is conducted for the total economic life time of the particular investment object and is so a multi-period total life accounting. It serves the purpose to provide information about the advantages of the particular investments and so provide a more rational basis for the investment decision. The reference object is not the company as a whole, but the single object (e.g. a machine or a building) respectively a single financial investment (e.g. a share or an obligation).
Besides the economical relevance of capital budgeting, there is its operational use. Each enterprise has to use the financial assets available to the optimum. Only in this way, it can persist on the market in the long run. The profit situation and chances of survival of your company will improve, if you recognize advantageous investments and carry them out. It is of equal importance to recognize disadvantageous investments and to refrain from carrying them out.
One of the first important steps in the preparation of capital budgeting is the determination of those financial criteria which are important to the particular company in the present situation.
MerzArnoldWuepper features an experienced, competent team of tax consultants, accountants, business economists and attorneys, which covers all significant queries and areas. According to the priorities, the following figures usually have to be included in the financial argumentation:
- future net cash-flow (net income method)
- capital value of the net cash-flow (discounted cash-flow analysis)
- internal interest rate (interest rate, which, when used, will lead to the capital value of the investment being zero, i.e. at which the cash value of the deposits equals the cash value of the payments)
- rate of return of the investment object (ROI = Return on Investment, also called feasibility study)
- amortization period
- total costs of the project
- total capital costs of the project
- total operational costs of the project
- costs of a unit (e.g. at a transaction, per employee, of a work place or a particular function)
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