Capital budgeting is used to ascertain the requirements of the long-term investments of a company. Examples of long-term investments are those required for replacement of equipments and machinery, purchase of new equipments and machinery, new products, and new business premises or factory buildings, as well as those required for R&D plans. The difficulty in making proper capital budgeting decisions arises as a consequence of the difficulty in determining the upfront costs, the periodic cash flows, even the proper WACC. All of these quantities must be estimated, and all of the ensuing estimates will contain some degree of uncertainty; the process in inherently risky. The different techniques used for capital budgeting include: • Profitability index

• Net present value
• Modified Internal Rate of Return
• Internal Rate of Return
Besides these methods, other methods that are used include Return on Investment (ROI), Accounting Rate of Return (ARR), Discounted Payback Period and Payback Period.

The different types of risks that are faced by entrepreneurs regarding capital budgeting are the following: • Corporate risk
• International risk
• Stand-alone risk
• Competitive risk
• Market risk
• Project specific risk
• Industry specific risk

Capital Budgeting and Risk

Uncertainties can exist when the outcome of an event is not known for certain, and when dealing with assets whose cash flows are expected to extend beyond one year, certainly, there’s element of risk in that situation. The evaluation of risk therefore depends, on decision maker ability to identify and understand the nature of uncertainty surrounding the key variables and on the other, having the tools and methodology to process its risk implications

The following methods are used for Risk Analysis in Capital Budgeting:

Sensitivity Analysis: This is also known as a "what if analysis". Because of the uncertainty of the future, if an entrepreneur wants...

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Risk Analysis in CapitalBudgetingCapitalbudgeting is used to ascertain the requirements of the long-term investments of a company.
Examples of long-term investments are those required for replacement of equipments and machinery, purchase of new equipments and machinery, new products, and new business premises or factory buildings, as well as those required for R&D plans.
The different techniques used for capitalbudgeting include:
Profitability index
Net present value
Modified Internal Rate of Return
Internal Rate of Return
Besides these methods, other methods that are used include Return on Investment (ROI), Accounting Rate of Return (ARR), Discounted Payback Period and Payback Period.
The different types of risks that are faced by entrepreneurs regarding capitalbudgeting are the following:
Corporate risk:
Corporate risk refers to the liabilities and dangers that a corporation faces. Risk managementis a set of procedures that minimizes risks and costs for businesses. The job of a corporate risk management department is to identify potential sources of trouble, analyze them, and take the necessary steps to prevent losses.
International risk
Risk that economic or political changes in a foreign country, for example, lack of currency reserves (Foreign Exchange), will cause...

...CAPITALBUDGETING
The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.
Also known as "investment appraisal."
Generating investment project proposals consistent with the firm’s strategic objectives;
Estimating after-tax incremental operating cash flows for the investment projects;
Evaluating project incremental cash flows;
Selecting projects based on a value-maximizing acceptance criterion; and
Continually reevaluating implemented investment projects.
* Since CASH is central to all decisions of the firm, the expected benefits to be received from the project is expressed in terms of Cash Flows and not income flows. Cash flows should be measured on an incremental, after-tax basis.
* a) include all cash flows that occur during the life of the project
* b) consider the time value of money
* c) incorporate the required rate of return on the project
* The minimum rate of return needed to induce investors or companies to invest.
* The minimum acceptable rate of return at a given level of risk. Different investors have different reasons for choosing their required returns. Normally, it is determined by a person's or institution's cost of...

...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...

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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)...

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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...

...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...

...The Basics of CapitalBudgeting
Integrated Case Study
Allied Components Company
You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler, Chrysler, Ford, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm’s ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives, because Allied is planning to introduce entirely new models after 3 years.
Here are the projects’ net cash flows (in thousands of dollars):
0 1 2 3
| | | |
Project L -100 10 60 80
Project S -100 70 50 20
Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows.
The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firm’s average project. Allied’s WACC is 10%. You must determine whether one or both of the projects should be accepted.
A. What is capitalbudgeting? Are there any similarities...

...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...