Capital Budget Recommendation
As a dedicated furniture maker and businessman, a clear understanding of the techniques used to assist in capital budgeting is important. There are several techniques used, each having advantages and disadvantages. Within this recommendation, the advantages and disadvantages of each technique will be briefly discussed. Additionally, discuss how each technique will assist in determining the desirable capital budget technique to recommend. Concluding with a course of action Mr. Navallez should take, along with calculation to support the recommended course of action. Capital budget techniques
Several techniques can be used to analyze an opportunity to invest in capital. Net Present Value (NPV) allows decision makers to analyze the present value (cost) of a capital investment and determine if the investment will compensate the cash outflow used for capital investment by an excess of the desired rate of return. Management “wants to know the rate of return to expect from investing”, therefore, will “use the internal rate of return method.” (Edmonds, Edmonds, Olds, McNair, & Schnieder, p.1156) The internal rate of return produces the actual rate of return on an investment; where as, net present value allows management to select the desired rate of return on an investment. A simple and straightforward technique is the payback period; as the name suggests “payback” this technique “shows how long it will take to recover the initial cash outflow (the cost) of an investment.” (Edmonds, Edmonds, Olds, McNair, & Schnieder, p.1164) Although, the payback period furnishes the time period when the cost is likely to be recovered, the technique does not illustrate compensation in excess of the initial cash outflow or assist in evaluating different prospective capital investments. Additionally, modified internal rate of return technique shows the adjusted rate of return based on the expected return on...