Capital Budgeting

* First, the cost of that particular project must be known.
* Second, estimates the expected cash out flows from the project, including residual value of the asset at the end of its useful life.
* Third, riskiness of the cash flows must be estimated. This requires information about the probability distribution of the cash outflows.
* Based on project’s riskiness, Management find outs the cost of capital at which the cash out flows should be discounted.
* Next determine the present value of expected cash flows.
* Finally, compare the present value of expected cash flows with the required outlay. If the present value of the cash flows is greater than the cost, the project should be taken. Otherwise, it should be rejected.