Capital budgeting is not only important to people in finance or accounting, it i
ID: 2801138 • Letter: C
Question
Capital budgeting is not only important to people in finance or accounting, it is essential to people throughout the business organization. For example, a marketing or production manager who is proposing a new product must be familiar with the capital budgeting procedures of the firm. If he or she is not familiar with the concepts presented in this chapter, the best idea in the world may not be approved because it has not been properly evaluated and presented. You must not only be familiar with your product, but also with its financial viability. For this Discussion please assume that you’re a high-level executive that must make a decision as to whether or not you should invest in a project that will yield positive cash flows. Assume that the investment to be made is $$500,000.What methods would you employ to assist in you evaluating and making your decision.
Explanation / Answer
There are several capital budgeting methods are widely used in the business for evaluation of best alternative of investment.
The important capital budgeting methods which will take in to cosideration the discount rate are good for evaluation as the methods will consider the time of value of money.
Internal Rate of Return: This is a return which can be used when the periodic cash inflows are the same amounts, and this is the return at which net present value will be zero. A higher IRR will be beneficial.
Net Present Value: This will discount all the cash inflows and cash out flows wither the same amounts are different with appropriate discount factor and identify the net present value. A higher net present value is always beneficial.
Profitability Index: This index will shows the how many times to the investment will cover by the all present values of cash in flows. A higher profitability index will be beneficial.