In earlier articles, we have discussed the capital budgeting and its types. Today we will discuss the methods of capital budgeting:
i) Pay back period method: this method means the period in which the total investment in the permanent assets pays back itself. This method is based upon the concept that every capital expenditure pays itself back within a certain period of time. Thus, this method measures the period of time means the time taken where the cost of project is recovered from the earning of the project itself. Continue reading “2 Methods of capital budgeting”
Last time I have discussed the process of capital budgeting with its importance. Toady we will discuss the different types of capital budgeting:
1.) Accept reject decisions:all the investment decisions which give more return than the cost of capital they are acceptable while the investment decisions which give less return than the cost of capital they are rejected. Thus firm will make investment only if the decision is acceptable. Continue reading “3 Types or Kinds of Capital budgeting”
Capital budgeting means making investment decisions in capital expenditure. Capital expenditure means making expenditure at present but the benefit of which is going to be received over a period of time. For example when we buy the fixed assets like land and building, we spent the expenditure once but its benefit is going to be received in the coming future. Capital budgeting is also known as investment decision making, capital expenditure decision, planning and analysis of capital expenditure and long term investment decision. Continue reading “Capital budgeting and its importance”
There are mainly 3 approaches to determine financing of working capital. Let us discuss them one by one:
1) Hedging approach or matching approach: this approach means matching the maturities of debt with the maturity of financial needs. It means the sources of funds should match with the nature of assets to be financed. There are two types of working capital permanent and temporary working capital. The hedging approach suggests that the permanent working capital requirement should be financed through long term funds, while temporary working capital should be financed through the short term funds. There is low cost, high risk and high profit in this approach. Continue reading “Approaches to determine financing of working capital”
The following are the 4 principles of working capital management policy:
1) Principle of equity position: as per this principle every investment in the current assets should contribute to the net worth of the firm. The position of current assets can be well judged by the two ratios; current assets to total asset and current asset to total sales. Continue reading “Principle of working capital management policy”
Working capital is also called revolving, circulating or short term capital. Every business require the funds for its establishment which is called fixed capital and require funds to carry out its day to day operations like purchase of raw material, payment of wages etc. which is called working capital. Thus, working capital is the capital required to finance the short term or current assets such as cash, securities, debtors, stock. It refers to current assets – current liabilities. The aim of working capital management is to manage the current assets and current liabilities of the firm in a satisfactory manner. The working capital should neither be excessive nor be inadequate. As the working capital management policies has effect upon the liquidity, profitability and health of the organization. It has three dimensions.
Dimension I: It is concerned with formulation of policies relating to risk, profitability and liquidity.
Dimension II: It is concerned with the decision about the composition and level of current assets.
Dimension III: It is concerned with the decision about the composition and level of current liabilities.