Capital Budgeting Rules
Capital Budgeting Rules: • Ignore accounting profit and take only cash flows. • Try only incremental basis ignore Average calculation. • Consider all incidental effects. • Ignore sunk cost (ie. Cost remain unaltered for various alternatives available is sunk cost) • Consider opportunity cost (Opportunity Loss is Opportunity cost) • Beware of allocated cost – Ignore them • Depreciation is an important cash flow when taxation is considered. If no taxation, no depreciation. • Interest should not be considered as part of the cost, in the arrival of cash inflow for investing decision problems. If deducted add back post tax interest. • Separate investing decision and financing decision. • Be consistent with inflation rates. All future cash flows is assumed as without inflation. Such cash flows are referred as real cash flows. Process of Capital Budgeting
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