Capital Budgeting Basics
A company undertakes capital budgeting in order to make the best decisions about utilizing its limited capital. For example, if you are considering opening a distribution center or investing in the development of a new product, capital budgeting will be essential. It will help you decide if the proposed project or investment is actually worth it in the long run. Identify Potential Opportunities

The first step in the capital budgeting process is to identify the opportunities that you have. Many times, there is more than one available path that your company could take. You have to identify which projects you want to investigate further and which ones do not make any sense for your company. If you overlook a viable option, it could end up costing you quite a bit of money in the long term. Evaluate Opportunities

Once you have identified the reasonable opportunities, you need to determine which ones are the best. Look at them in relation to your overall business strategy and mission. See which opportunities are actually realistic at the present time and which ones should be put off for later. Cash Flow

Next, you need to determine how much cash flow it would take to implement a given project. You also need to estimate how much cash would be brought in by such a project. This process is truly one of estimating--it takes a bit of guesswork. You need to try to be as realistic as you can in this process. Do not use the best-case scenario for your numbers. Most of the time, you need to use a fraction of that number to be realistic. If the project takes off and the best-case scenario is reached, that is great. However, the odds of that happening are not the best on new projects. Select Projects

After you look at all of the possible projects, it is time to choose the right project mix for your company. Evaluate all of the different projects separately on their own merits. You need to come up with the right combination of projects that will work...

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CapitalBudgeting Analysis Project
MBA 612
The General CapitalBudgeting Process and how it is implemented within Organizations
The general capitalbudgeting process is the tool by which an organization determines its choice of investments through analyzing and evaluating its cash in and out flows. The capital budget process is vital to the organizations mere existence. Capitalbudgeting decisions can mean the difference between the company’s survival and its extinction, especially in today’s volatile global economic environment. The goal of survival for an organization is to create the maximum amount of shareholder wealth. To achieve positive shareholder wealth, the organization must maximize its share price through creating a positive net present value. The organization cannot achieve shareholder wealth without the use and understanding of a solid capital budget process (Megginson, Smart, Graham, 2010).
Capitalbudgeting analysis is really a test to see if the benefits (cash inflows) are large enough to repay the company for three things the cost of the asset, the cost of financing the asset (interest) and a rate of return (Investopedia, n.d.).
The capital budget process involves three basic steps:
1)...

...CapitalBudgeting
Part I
PV= FV / (1+i)^y PV= present value, FV= future value, i= discount rate, and y= time.
1a) If the discount rate is 0%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 0% -$400,000
1 $100,000 0% $100,000
2 $120,000 0% $120,000
3 $850,000 0% $850,000
Answer: The projects net present value is $670,000
If the discount rate is 2%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 2% -$400,000
1 $100,000 2% $98,039
2 $120,000 2% $115,340
3 $850,000 2% $800,974
Answer: The projects net present value is $614,353.45
If the discount rate is 6%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 6% -$400,000
1 $100,000 6% $94,340
2 $120,000 6% $106,800
3 $850,000 6% $713,676
Answer: The projects net present value is $514,815.59
If the discount rate is 11%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 11% -$400,000
1 $100,000 11% $90,090
2 $120,000 11% $97,395
3 $850,000 11% $621,513
Answer: The projects net present value is $408,997.46
With a cost of Capital of...

...WHAT IS CAPITALBUDGETING?
1.
2.
Decision making process of selecting and evaluating longterm investments. Examples include the decision to replace
equipment, to develop new product, or to build new shop at
a new branch of operations.
It is very crucial for companies to make the right decisions
because these projects require a huge amount of cash
outflow committed for many years. A right decision will
increase the firm’s value as well as the shareholders’ wealth.
A wrong decision will result in a drop in firm value as well
as shareholders’ wealth.
CapitalBudgeting
1
CapitalBudgeting Process
1.
2.
3.
4.
5.
Generating long-term investment proposals consistent with a
firm’s long-term objectives
Estimating the relevant after-tax incremental cash flows for
these project proposals
Evaluating these cash flows
Selecting the project that will maximize shareholders’
wealth
Reevaluating these projects from time to time for control
purposes and carrying out post-audits for completed
projects.
CapitalBudgeting
2
TYPES OF PROJECTS
1.
Independent projects – are projects whose cash flows are
not affected by the acceptance or nonacceptance of other
projects. If a firm has unlimited funds to invest, all the
independent projects that meet its minimum investment
criteria can be implemented. For example, a firm with...

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CapitalBudgeting
QRB/501
July 25, 2013
On this paper the reader will be able to find the rationale in the analysis of a specific capitalbudgeting case study. Definitions along with explanations related to capitalbudgeting such as Internal Rate of Return (IRR) and Net Present Value (NPV) will be provided and debriefed. It is extremely relevant to mention that capitalbudgeting allows the companies to analyze one or more projects to decide eventually which project or piece of equipment would be most profitable or suitable (economically), according to the needs and the capacities the company has.
Before entering into the analysis a little further and into the company chosen let us define what Net Present Value really is. According to Business Dictionary (2011) the definition of NPV is “The difference between the present value of the future cash flows from an investment and the amount of investment. Present value of the expected cash flows is computed by discounting them at the required rate of return.” “NPV is considered as one of the two discounted cash flow techniques, the other one is the Internal Rate of Return”. There are different types of net present values such as the negative net present value (worse return), the positive present value (better return), and the zero net present value that basically means that the original amount...

...CAPITALBUDGETING
PRINCIPLES
Capitalbudgeting is the process of evaluating and implementing a firm’s investment opportunities, by virtue of properly identifying such investments that are likely to enhance a firm’s competitive advantage and increase shareholder wealth. A typical capitalbudgeting decision involves a large up-front investment followed by a series of smaller cash inflows. A typicalcapitalbudgeting process is focused around following basic principles:
1) Decisions are based on potential cash flows and not accounting income: If a project is undertaken and subsequently some relevant incremental cash flows are to flow out by virtue of such a capitalbudgeting plan, the relevant cash flows are to be considered as a part of the budgeting process, and the decisions on capitalbudgeting have to take such incremental cash flows into consideration, before properly evaluating such a capitalbudgeting plan. However, the sunk costs, which can’t be avoided, even by overlooking or avoiding such a capitalbudgeting plan, should not be considered for acceptance or rejection of the project.
However, while finalizing a capitalbudgeting decision, one needs to examine the impact of implementing such a plan on...

...Capital Budget Recommendation
Anne Adams
University of Phoenix
Managerial Accounting and Legal Aspects of Business
AC543
Sean DAmico
August 20, 2012
Abstract
This paper will give a comparison between the various preferred capitalbudgeting evaluation techniques in the corporate business setting. There will be a recommendation given for the Guillermo Furniture Company based on the results of one or more evaluation techniques, which in turn will help direct the financial health of the organization.
Corporations are continually striving to improve the financial health of its organization and one strategic way many corporations are doing that is through capitalbudgeting. Capitalbudgeting involves choices. The choices revolve around projects that will add value to the organization. The projects can include acquiring land, purchasing a truck, or replacing old equipment. Many times, corporations are encouraged to undertake projects that will increase its profitability. The challenge is to find the appropriate evaluation method to bring the intended profitability into reality.
The three preferred evaluation methods that many corporations use are net present value, internal rate of return, and payback period. Many corporations often calculate capitalbudgeting solutions using all three methods. However, each method often produces...

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CapitalBudgeting
FINC 620 - Financial Management
May 19, 2014
Introduction
According to Investopedia, capitalbudgeting is the process in which an organization decides whether certain large projects, such as building an addition or purchasing large equipment, are worth the investment (Capitalbudgeting, 2014). Ifcapitalbudgeting in not performed prior to a major purchase or beginning a large project, it could be detrimental to an organization. Because of the limited amount of capital that may be available to an organization at any given time, it is critical that company leaders utilize capitalbudgeting methods to make the determination which ventures will bring the company the biggest return on their investment. Among these capital budget methods are Payback Period, Net Present Value (NPV), and Internal Rate of Return (IRR).
Payback Period
According to Marty Schmidt, the payback period is the cash flow analysis metric that calculates the length of time for capital acquisitions or investments to pay for themselves, the length of time it takes to cover costs, or what is the investment breakeven point (Schmidt, 2014). The payback period is quite an easy financial metric, and is equal to the...

...Question a
What is capitalbudgeting? Are there any similarities between a firm’s capitalbudgeting decisions and an individual’s investment decisions?
Capitalbudgeting is the process of analyzing potential additions to fixed assets. Capitalbudgeting is very important to firm’s future because of the fixed asset investment decisions chart a company’s course for the future. The firm’s capitalbudgeting process is very much same as those of individual’s investment decisions. There are some steps involved. First, estimate the cash flows such as interest and maturity value or dividends in the case of bonds and stocks, operating cash flows in the case of capital projects. Second is to assess the riskiness of the cash flows. Next, determine the appropriate discount rate, based on the riskiness of the cash flows and the general level of interest rates. This is called project’s required rate of return or cost of capital in capitalbudgeting. Then, find the PV of expected cash flows and the asset’s rate of return. If the PV of the inflows is greater than PV of outflows (NPV is positive), or if the calculated rate of return (IRR) is higher than the project cost of capital, accept the project.
Question b
What is the difference between independent and mutually exclusive...