PLEASE HELP WITH A RESPONSE TO THE POST BELOW. Thank you :)

1. How do we traditionally define capital budgeting in finance?

• Capital budgeting is a technique used in Finance by companies to evaluate and rank the investment projects. These are the large expenditure projects including the purchase of plant and equipment, investment in new business, construction of buildings etc.

1. What is the purpose of capital budgeting in the business firm, and how is it used?

• Capital budgeting calculation involves cash flows with conversion into time value of money and arriving at a profit. There are several methods used for evaluating capital budgeting projects. Payback period method, Net present value method, internal rate of return method and profitability index. All of these methods help a manager to analyze and select the projects based on profitability and returns. It is used to help the managers in arriving at investment decisions compared with the cost of capital. They also give the knowledge of time period within which cash outflows will be returned. Large businesses rely on NPV and IRR to take investment decisions. This technique provides a real return value for a business rather than just calculating the profits. Traditional accounting involves making decisions based on profits without considering the time value of money. Capital budgeting technique helps the manager to take decisions with present values of future returns.