Capital budgeting process refers to the total process of Germinating evaluating. selecting and following up on capital expenditure alternatives.” The firm allocates’or budgets financial resources new investment proposed.. Basically, the firm may be confronted with three types of capital budgeting decisions: (j) the accept-reject decision; (ii) that mutually exclusive choice decision; and (iii) the capital rationing decision.
Accept-reject Decision This is a fundamental decision in capital budgeting. If the project is accepted, the firm would invest in it; if the proposal is rejected, the firm does not invest in it. In general, all those proposals which yield a rate uf return greater man a certain required rate of return or cost of capital are accepted and the restart rejected. By applying this criterion, all Independent projects are accepted, Independent projects all projects that do not compete with one. another in such a that the acceptance of one precludes the possibility of acceptance of another. Under the accept-reject decision, all independent projects that satisfy the minimum investment criterion should be implemented.
Mutually Scorpius Project Decisions Mutually exclusive project,15 are those which compete with other.projects in such a way that the acceptance of one will exclude the acceptance of the other projects. The alternatives are mutually exclusive and only one may he chosen. Suppose, a company is intending to buy a new folding machine. There are three competing brands, each with a different initial investment and operating costs. Tile three machines represent mutually exclusive alternatives, as only one 0f these can be selected. 11 may be noted here that the mutually exclusive project decisions are not ‘independent of the accept-reject decisions. The project(s) should also be acceptable under the latter decision. In brief, in our example; if all the machines are rejected under the accept-reject decision, the firm should not buy a new machine. Exclusiveness-investment decisions acquire significance when more than one proposal is acceptable under the accept-reject decision, Then, some technique has to be used to determine the ‘best’ one. The acceptance of this ‘best’ alternative automatically eliminates the other alternatives.