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DISCOUNTED cash flow:- in finance it is the analysis of a method which talks about the value of the project, COMPANY and the asset which is being used using the time value of MONEY. In this all estimation has been taken and discounted for the present value as it shows both incoming and outgoing. This kind is used for INVESTMENT of the finance and used for FINANCIAL management.

Discounted cash flow:- in finance it is the analysis of a method which talks about the value of the project, company and the asset which is being used using the time value of money. In this all estimation has been taken and discounted for the present value as it shows both incoming and outgoing. This kind is used for investment of the finance and used for financial management.

Calculation of the PRESENT value :- in this the WORTH of the future SUM is given and the specified rate of return is been SHOWN. It has lots of variations in this is that the future CASH flow are discounted at the discount rate and it also represents the low present value of future cash flow.

Calculation of the present value :- in this the worth of the future sum is given and the specified rate of return is been shown. It has lots of variations in this is that the future cash flow are discounted at the discount rate and it also represents the low present value of future cash flow.

Time value of MONEY is the value which is earned over a given amount of time in terms of interest. For example if Rs. 200 money will be invested for about 1 year then the earning will be of 5% interest which will be worth 205 after one year. So using this time value of money TERMINOLOGY the FUTURE value can be predicted.

Time value of money is the value which is earned over a given amount of time in terms of interest. For example if Rs. 200 money will be invested for about 1 year then the earning will be of 5% interest which will be worth 205 after one year. So using this time value of money terminology the future value can be predicted.

In the case of PAY back period technique which is used for evaluation of capital EXPENDITURE proposal in which the CASH inflows are even and constant and the period can be computed by dividing the original investment to the annual cash-inflow. This can be also represented in number of years which are required to recover the original cash which has been invested in the project. This the method which is used to measure the period of time as it TAKES for the original cost of the project which has to be re3covered from the earning which are additional to the project.

In the case of pay back period technique which is used for evaluation of capital expenditure proposal in which the cash inflows are even and constant and the period can be computed by dividing the original investment to the annual cash-inflow. This can be also represented in number of years which are required to recover the original cash which has been invested in the project. This the method which is used to measure the period of time as it takes for the original cost of the project which has to be re3covered from the earning which are additional to the project.

The techniques which are AVAILABLE for the evaluation of capital EXPENDITURE proposal DEPEND on the management which has to select and have the PROFITABLE proposal out of different proposal under study. The TECHNIQUE which is used are as follows:-

1. Degree of urgency method.
2. Pay back method.
3. Rate of return method which is not adjusted properly.
4. Present value method which is adjusted through time and it also includes net present value method.

The techniques which are available for the evaluation of capital expenditure proposal depend on the management which has to select and have the profitable proposal out of different proposal under study. The technique which is used are as follows:-

PERIOD is not involved with the time value of money and it doesn't EVEN get considered WHEREAS discounted pay back period is another form which involves this and have the real value of cash inflows which are measured in CURRENT AMOUNT of money which are given as a discount amount. The rate with which they are given at any interest rate are called as Discount rate.

Paybck period= year before recovery+ unrecovered cost at the start of year/ cash flow during the year

Period is not involved with the time value of money and it doesn't even get considered whereas discounted pay back period is another form which involves this and have the real value of cash inflows which are measured in current amount of money which are given as a discount amount. The rate with which they are given at any interest rate are called as Discount rate.

Paybck period= year before recovery+ unrecovered cost at the start of year/ cash flow during the year

Accounting rate of RETURN is also know as Average rate of return which GIVES the financial ratio used in capital budgeting. The ratio takes time value of money factor which calculates the return and the NET income can be generated from the proposed capital investment. It is used to show the percentage return. The formula of computation is:

ARR= Average profit/average investment

Accounting rate of return is also know as Average rate of return which gives the financial ratio used in capital budgeting. The ratio takes time value of money factor which calculates the return and the net income can be generated from the proposed capital investment. It is used to show the percentage return. The formula of computation is:

ARR= Average profit/average investment

Capital BUDGETING limitations are as follows:-

1. It has long term implementations which can't be used in short term and it is used as operations of the business. A wrong decision in the early stages can affect the long-term survival of the company. The operating cost gets increased when the investment of fixed assets is more than required.
2. Inadequate investment makes it difficult for the company to increase it budget and the capital.
3. Capital budgeting involves large number of funds so the decision has to be TAKEN carefully.
4. Decisions in capital budgeting are not modifiable as it is hard to locate the market for capital goods.
5. The ESTIMATION can be in respect of cash OUTFLOW and the revenues/saving and costs ATTACHED which are with projects.

Capital budgeting limitations are as follows:-

Internal rate of return is used to calculate the even break point which is also an alternative way to calculate the cost of capital and it INCLUDES the risk premium. It is the rate of return which is used in capital budgeting which gives the indication of the profitablility of investments. This is also called as discounted cash flow rate of return. This can't be used for mutually exclusive projects where the SELECTION can be done to only ONE PROJECT RATHER than both the projects.

Internal rate of return is used to calculate the even break point which is also an alternative way to calculate the cost of capital and it includes the risk premium. It is the rate of return which is used in capital budgeting which gives the indication of the profitablility of investments. This is also called as discounted cash flow rate of return. This can't be used for mutually exclusive projects where the selection can be done to only one project rather than both the projects.

Profitability index (PI) is also known as profit investment ratio (PIR) and also termed as value investment ratio(VIR) which tells that a proposed PROJECT will have the ratio of payoff to investment. It is like a tool which is used for ranking projects and it ALLOWS quantifying the amount of value CREATED PER unit of investment. If the value of profitability index is less than 1 then accept the project and if it is greater than one then reject the project. Another way to calculate the profitability index is future cash flows divided by the initial investment.

Profitability index (PI) is also known as profit investment ratio (PIR) and also termed as value investment ratio(VIR) which tells that a proposed project will have the ratio of payoff to investment. It is like a tool which is used for ranking projects and it allows quantifying the amount of value created per unit of investment. If the value of profitability index is less than 1 then accept the project and if it is greater than one then reject the project. Another way to calculate the profitability index is future cash flows divided by the initial investment.

Steps which are taken to control the capital budgeting process are as follows:-

1. Indentify the PROPOSALS which are already involved in capital budgeting.
2. Do the screening of the proposal for future estimation.
3. Evaluate the different type of proposals.
4. Fix the PRIORITIES of the proposals.
5. Final approval and planning of the capital expenditure.
6. IMPLEMENT the proposal.
7. REVIEW the proposal.

Steps which are taken to control the capital budgeting process are as follows:-

NET present value (NPV) is a financing term which shows the cash FLOW worth for both inflow and outflow and it is been defined as the sum of the present values of cash flow. NPV is formulated as future cash flow subtracted from the purchase price. It is also the tool to calculate discounted cash flow and is a standardized METHOD for the analysis of capital budgeting.

The advantages and disadvantages of it are as follows:-

1. The advantage of NPV is NEEDED for long term projects and it measures the excess or shortfall of cash flows as it is used for the reinvestment at the DISCOUNT rate which is used for this.
2. The advantage is that the adjustment for this is a bit risky and it adds a bit of difficulty in making the cost higher.

Net present value (NPV) is a financing term which shows the cash flow worth for both inflow and outflow and it is been defined as the sum of the present values of cash flow. NPV is formulated as future cash flow subtracted from the purchase price. It is also the tool to calculate discounted cash flow and is a standardized method for the analysis of capital budgeting.

The advantages and disadvantages of it are as follows:-