Critically appraise the application of traditional capital budgeting Assignment

Critically appraise the application of traditional capital budgeting techniques - Assignment Example At the same time, many business organizations failed to survive stiff market competition and subsequently went out of the market. The last decade witnessed a series of corporate scandals and bank failures due to poor managerial accountability and ineffective corporate governance practices. Hence, today’s managements give particular focus to corporate governance principles and long term business decisions. In this context, the concept of capital budgeting is of considerable significance because it evaluates future cash inflows and outflows on a prospective business project and thereby determines it potentiality. After the global financial crisis 2008-09, capital budgeting is specifically considered to be an integral part of the financial management. This paper clearly describes how the capital budgeting technique can contribute to the long term sustainability of business organizations. In addition, the influence of capital budgeting on managerial efficiency and organizational p erformance is also explained in this paper. Some recent developments in the application of capital budgeting have increased this method’s relevance in the modern business context. ... back period, net present value, accounting rate of return, internal rate of return, equivalent annuity, profitability index, real options valuation, and modified internal rate of return (Drury & Tayles 1997). The method used for capital budgeting may vary with regard to the change in size of the business. Simply, capital budgeting is a tool used for long term decision making. Although capital budgeting is traditionally used for making sound long term investment decisions, many other real-life applications of this technique have been developed recently. Capital budgeting is a complex process and therefore careful management of this process is vital to achieve the desired outcomes. A post project audit is conducted to evaluate the completed project. More precisely, under a capital investment project, actual cash inflows and other benefits are compared with figures forecasted at the time of project appraisal. This paper will analyze the objectives of capital budgeting, recent developmen ts in its applications, and the role of post-completion auditing. 2. Capital Budgeting and Post Completion Auditing Capital budgeting can be simply referred to the planning process deployed to evaluate whether or not a firm’s long term investments including new plants, new machinery and products, and research and development project are worth pursuing. In a broader sense, â€Å"capital budgeting can be defined as the analysis of a proposed investment that is a long-term asset used by the business to yield a return over a period of time that is greater than one year† (Williamson et al 2008, n.a). Management experts argue that capital budgeting can also enhance the growth of non-profit organizations because potential long term investment decision would assist those institutions to expand