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Student’s name

Mohammed Omar Razak

Student number 201717409 DECLARATION BY

STUDENT Damelin Name of Campus Year of Study 2020 I, the undersigned declare

Semester

that: Programme Diploma in Business Management  I have retained a Module Name Business Ethics copy of this Lecturer assessment.

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 I understand what Due date plagiarism is and are

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Table of Contents

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Introduction 3 4 5

work.

6 Signa ture 1 of |Page Stud ent

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Capital Budgeting Techniques Introduction Capital budgeting is a set of techniques used to decide when to invest in projects. For example, one would use capital budgeting techniques to analyse a proposed investment in a new warehouse, production line, or computer system. Capital budgeting involves choosing projects that add value to a company. The capital budgeting process can involve almost anything including acquiring land or purchasing fixed assets like a new truck or machinery. There are a number of capital budgeting techniques available, which include:

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Payback period method

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Accounting rate of return method (ARR)

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Discounted payback method

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Net present value method (NPV)

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Internal rate of return method (IRR)

Payback period method As the name suggests, this method refers to the period in which the proposal will generate cash to recover the initial investment made. It purely emphasizes on the cash inflows, economic life of the project and the investment made in the project, with no consideration to time value of money. Through this method selection of a proposal is based on the earning capacity of the project. With simple calculations, selection or rejection of the project can be done, with results that will help gauge the risks involved. However, as the method is based on thumb rule, it does not consider the importance of time value of money and so the relevant dimensions of profitability.

Accounting rate of return method This method helps to overcome the disadvantages of the payback period method. The rate of return is expressed as a percentage of the earnings of the investment in a particular project. It works on the criteria that any project having ARR higher than the minimum rate established by the management will be considered and those below the predetermined rate are rejected. This method takes into account the entire economic life of a project providing a better means of comparison. It also ensures compensation of expected profitability of projects through the concept of net earnings. However, this method also ignores time value of money and doesn’t consider the length of life of the projects. Also, it is not consistent with the firm’s objective of maximizing the market value of shares.

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Discounted payback method When using the discounted payback period method, one takes into account the time value of money, that is one discounts back any future cash flows to a present value and then compares the investments on a payback basis. This method simply states that R1 today is worth more than R1 at the end of the year. The risk associated with time must be compensated at a rate that equals business plus financial risk. This rate is called the weighted average cost of capital (WACC).

Net present value method This is one of the widely used methods for evaluating capital investment proposals. In this technique the cash inflow that is expected at different periods of time is discounted at a particular rate. The present values of the cash inflow are compared to the original investment. If the difference between them is positive (+) then it is accepted or otherwise rejected. This method considers the time value of money and is consistent with the objective of maximizing profits for the owners. However, understanding the concept of cost of capital is not an easy task.

Internal rate of return method This is defined as the rate at which the net present value of the investment is zero. The discounted cash inflow is equal to the discounted cash outflow. This method also considers time value of money. It tries to arrive to a rate of interest at which funds invested in the project could be repaid out of the cash inflows. However, computation of IRR is a tedious task. It is called internal rate because it depends solely on the outlay and proceeds associated with the project and not any rate determined outside the investment

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IMPORTANCE OF CAPITAL BUDGETING 

Long term investments involve risks: Capital expenditures are long term investments which involve more financial risks. That is why proper planning through capital budgeting is needed.

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Huge investments and irreversible ones: As the investments are huge but the funds are limited, proper planning through capital expenditure is a pre-requisite. Also, the capital investment decisions are irreversible in nature, i.e. once a permanent asset is purchased its disposal shall incur losses.

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Long run in the business: Capital budgeting reduces the costs as well as brings changes in the profitability of the company. It helps avoid over or under investments. Proper planning and analysis of the projects helps in the long run.

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Ways to Prevent Unethical Behavior in the Workplace Smallbusiness.chron.com https://smallbusiness.chron.com/ways-prevent-unethical-behaviorworkplace-21344.html

Business Ethics | Boundless Business Courses.lumenlearning.com

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https://courses.lumenlearning.com/boundless-business/chapter/businessethics/

Another top Transnet official suspended for dodgy contracts CityPress https://city-press.news24.com/News/another-top-transnet-officialsuspended-for-dodgy-contracts-20181031

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Benefits of B-BBEE - BEE Empowered BEE Empowered https://bempowered.net/information/benefits-of-bee/

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Weaknesses in BEE Implementation - Pholosang BEE Resolution Services Pholosang.co.za https://pholosang.co.za/about-pholosang/5-weaknesses-in-beeimplementation

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