Please write at least three well composed paragraphs that describe the following
ID: 2739729 • Letter: P
Question
Please write at least three well composed paragraphs that describe the following capital budgeting calculations: Pay-back, Net Present Value (NPV), and Internal Rate of Return (IRR). Compare the calculations to each other and briefly discuss which method you think is most useful. Please write at least three well composed paragraphs that describe the following capital budgeting calculations: Pay-back, Net Present Value (NPV), and Internal Rate of Return (IRR). Compare the calculations to each other and briefly discuss which method you think is most useful. Please write at least three well composed paragraphs that describe the following capital budgeting calculations: Pay-back, Net Present Value (NPV), and Internal Rate of Return (IRR). Compare the calculations to each other and briefly discuss which method you think is most useful.Explanation / Answer
The Capital Budgeting evalution methods are:
The Net Present Value (NPV) approach is the most intuitive and accurate valuation approach to capital budgeting problems. Discounting the after-tax cash flows by the weighted average cost of capital allows managers to determine whether a project will be profitable or not.
The Pay-back rule, also called the payback period, is the length of time required to recover the cost of an investment. All other things being equal, the better investment is the one with the shorter payback period.
The internal rate of return (IRR) is used by corporations to compare and decide between capital projects whose is having higher IRR which makes the NPV to zero. Thus, the IRR is the interest rate (also known as the discount rate) that will bring a series of cash flows (positive and negative) to a net present value (NPV) of zero or equal to the current value of cash invested.
The above three capital budgeting calculating methods, the NPV tells the Net Value of the Future Cashflow, Payback Period method tells the period in which the project returns back the initial investment.
Out of these capital budgeting calculating methods, as already told, the NPV is the most appropriate and accurate method of evaluation.