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# Capital Investment Analysis/Capital Budgeting:

## Learning Objectives:

After studying this topic you should be able to:

 Define and explain capital investment analysis. Evaluate capital investment proposals using average rate of return method, cash payback method, net present value method, and internal rate of return method. Explain the advantages and disadvantages of various methods of evaluating capital investment proposals. Explain the concept of the time value of money (present value and future value).

## Contents:

Capital investment analysis is a process of planning, evaluating, and controlling investments in plant assets. It is also known as capital budgeting.  Management should carefully develop and implement capital investment analysis because it involves long term investment in assets that effects operations for many years. Capital investment decisions are very important because they involve long term commitment of funds. An enterprise has to meet obligations to creditors and provide dividends to stockholder so these investments must earn a sufficient rate of return.

Employees at all levels should be encouraged to submit their proposals for capital investments. Serious considerations should be given to all reasonable proposals. Management should carefully identify the effects of economic implications that are expected from these proposals. Employees whose proposals are accepted for implementation should be rewarded by the the enterprise.

 Methods for the evaluation of capital investment analysis Average rate of return or accounting rate of return method Cash payback method Net present value method Internal rate of return method Simple interest Future value of a single sum Future value of an annuity Present value of a single sum Present value of an annuity Qualitative considerations in capital investment analysis Capital investment analysis and unequal proposal lives Capital rationing decision process Cost/benefit analysis Difference between simple interest and compound interest Difference between nominal and effective interest rate Future value of \$1 table Present value of \$1 table Present value of ordinary annuity table Future value of ordinary annuity table

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