Capital

WHAT IS CAPITAL BUDGETING? INTRODUCTION capital of the United States budgeting is a ask managerial tool. matchless duty of a financial manager is to choose investitures with competent capital flows and rates of return. Therefore, a financial manager essential be able to decide whether an investment is worth confinement and be able to choose intelligently betwixt deuce or more alternatives. To do this, a sound social occasion to evaluate, compare, and select projects is needed. This procedure is called capital budgeting. Basic Steps of Capital Budgeting 1.Estimate the bullion flows 2.Assess the riskiness of the cash flows. 3. visualize the appropriate discount rate. 4.Find the PV of the expected cash flows. 5. lead the project if PV of inflows > costs. IRR > Hurdle Rate and/or payback < policy evaluation Techniques A. Pay back period (PBP) B. interlocking present revalue (NPV) C.Internal rate of return (IRR) D. Profitability index (PI) DISCUSSION A. payback PERIOD Payback period = Expected number of years required to recover a projects cost. | trade union movement LExpected Net Cash Flow| Year| Project L| Project S| 0123| ($100)106080| ($100)(90)(30)50| PaybackL = 2 + $30/$80 years = 2.4 years. PaybackS = 1.6 years. Weaknesses of Payback: 1. Ignores the time value of money. This weakness is eliminated with the discounted payback method. 2. Ignores cash flows occurring after the payback period.

B. NET PRESENT VALUE The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.  If the projects are independent, accept both. Note: NPV declines as k increases, and NPV rises as k decreases. C. INTERNAL RATE OF RETURN . Project L: 18.1% 0 1 2 3 100.00 10 60 80... If you demand to get a full essay, order it on our website: Ordercustompaper.com

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