Capital budgeting

Capital budgeting refers to decisions related to proposed long-term Capital Outlays. It is a formal process undertaken by a firm to efficiently invest in long-term activities in anticipation of expected flow from future benefits over a number of years. These benefits which may arise from a capital budgeting decision may be either in the form of increased revenues or reduction in costs. The capital budgeting decisions have enormous impact on the basis of the character of the firm on a long-term basis.

The main features of capital budgeting are:

i. Potentially large anticipated benefits

ii. Relatively high degree of risk

iii. Relatively long time period between the initial outlay and anticipated returns

Difficulties in Execution of Capital Budgeting

Capital expenditure decisions are of considerable significance as the future success and growth of the firm depends heavily on them. But they are beset with a number of difficulties:-

1. Firstly, the benefits from investments are received in some future period and the future is uncertain. Therefore, there is an element of risk.
2. Secondly, for the purpose of capital budgeting the future revenues have to be estimated. These estimated revenues depend on a number of factors like price, advertising and promotion etc. and adding to the uncertainties are the possibilities of shift in consumer preferences, the actions of competitors, technological developments etc.
3. Thirdly, costs incurred and benefits received from capital budgeting decisions occur in different time periods. They are logically not comparable because of the time value of money.
4. Lastly, it is not often possible to calculate in quantitative terms all the benefits or the costs relating to a particular investment decision.

Ask a finance expert for FREE here: http://www.transtutors.com/forums/

For more info please visit: http://www.transtutors.com/finance-homework-help/capital-budgeting-project-analysis/

Cost of Capital

A Company procures Capital from various sources viz. Shareholders, Borrowings from Banks, Borrowings from the Public among others. Each source of capital involves some cost. This cost to the company is the "minimum rate of return" which it must earn on its investments in order to satisfy the various categories of investors who have made investments in the form of shares, debentures or term loans. Unless the Company earns this minimum rate, the investors will be tempted to pull out of the company. This cost is referred to as the Cost of Capital.

IMPORTANCE OF COST OF CAPITAL

1) Capital Budgeting Process
Cost of Capital works as a helpful tool in the Capital Budgeting Process. For Example in the Net Present Value Method (NPV) or in the discounted Cash Flow Method, the Future Cash Inflows of a Project are discounted by this rate.

2) Capital Structure Decisions
Cost of Capital also plays a pivotal in the Capital Structure Decisions. When the Management of the firm is to decide the optimum Capital Structure for the Company, then the Cost of Capital should be minimized and the value of the firm should be maximised.

3) Comparative analysis of various sources of finance
The Cost of Capital Concept can also be used in comparative analysis of various sources of Finance. Which source should be chosen can be determined on the basis of Cost of Capital.

4) Evaluation of Financial efficiency of Top Management
Cost of Capital is also helpful in evaluating the financial efficiency of the top management. The surplus generated over and above the cost of capital is used in determining the efficiency of the Management.

Ask our finance experts for FREE here:
http://www.transtutors.com/forums/
For more info please visit:
http://www.transtutors.com/finance-homework-help/cost-of-capital/

Risk and Return

Starting a new venture that is totally unique?? The good news is that its risky and the returns associated with high risk are always higher. But with high risk there also comes a higher possibility of failure. What is needed is an optimum or acceptable value of risk to get a decent return.
Lets define the terms involved now. Risk is the chance that the actual outcome from an investment will differ from the expected outcome and Return is the motivating force, inspiring the investor in the form of Rewards, for undertaking the investment.
There are several factors involved in this which include

• Measuring the Rate of Return
• Sources of Risk
• Measurement of Risk
• Risk and return of a Portfolio
• Measurement of Beta
• Capital Asset Pricing Model (CAPM)

Transtutors is the best place to get help for concepts related to risk and return.
Our highly experienced tutors are very competent in providing prompt and accurate responses to all your finance homework questions.
Consult our finance experts for FREE here
http://www.transtutors.com/forums/
For more info please visit
http://www.transtutors.com/finance-homework-help/risk-and-return/

Time Value of Money

Time Value of money or TVM arises from the fact that the value of money is time dependent. The Value of money received today is different from the value of money received after some time. This principle is based on the following reasons:-

Inflation-Under Inflationary conditions the value of money, expressed in terms of
purchasing power over goods and services, generally declines giving
rise to the principle of Time Value of Money.

Risk-$ 1 received today is certain whereas $ 1 receivable tomorrow is less certain."The bird in the hand" principle is extremely important at the time of investment appraisal again giving rise to the principle of Time Value of Money.

Consumption Preferences -There is a strong preference for the immediate rather than delayed consumption. The promise of a bigger pizza next week counts less for a starving man.

Investment Opportunities-Money like any other desirable commodity has a price, given the choice of $ 100 now or the same amount in one year, it is always preferable to take the $ 100 now because it could be invested over the next year at say 10% interest rate to produce $110 at the end of the year.

Time Value of Money is one of the most important concepts in finance. A deep understanding of this is required to lay the foundations of a sound degree in finance.

Transtutors can help you with any problems related to Time Value of Money.
Ask an expert for FREE now at our forum.
For more info please visit http://www.transtutors.com/finance-homework-help/time-value-of-money/

Finance Homework Help at Transtutors

Finding help with finance homework can be a pain in the neck specially online. Concepts like time value of money, risk and return, cost of capital etc require a deep knowledge and understanding of the world of finance. Very few websites provide prompt and accurate solutions to problems in finance. Transtutors.com helps students worldwide with demystifying finance and making it easy and fun to understand.
Want free solutions to your finance homework or assignment? Just post your questions here to see how we solve your finance problems in a step by step and logical manner. http://www.transtutors.com/forums/Finance
Our finance tutors have tons of teaching and industry experience. They know exactly how to explain the most difficult problems in a method best suited to your personal needs using audio visual presentations and detailed finance tutorials.
http://www.transtutors.com/finance-homework-help/
Try asking one of our experts for free today and get world class finance homework help.