There are a number of techniques of capital budgeting. Some of the methods are based on the concept of incremental cash flows from the projects or potential investments. There are some other techniques of capital budgeting that are based on the accounting rules and accounting earnings. However, the techniques based on the accounting rules are considered to be improper by the economists. The hybrid and simplified techniques of capital budgeting are also used in practice. Capital budgeting is the process of managing the long-term capital of a firm in the most profitable way.

The prime task of the capital budgeting is to estimate the requirements of capital investment of a business. The capital allocation to various projects depending on their needs and selection of proper project for the business also fall under the canopy of capital budgeting concept.

Some of the major techniques of capital budgeting are:
* Profitability index
* Net present value
* Modified Internal Rate of Return
* Equivalent annuity
* Internal rate of return

Profitability Index
The profitability index is a technique of capital budgeting. This holds the relationship between the investment and a proposed project's payoff. Mathematically the profitability index is given by the following formula: Profitability Index = (Present Value of future cash flows) / (Present Value of Initial investment

The profitability index is also sometimes called as value investment ratio or profit investment ratio. Profitability index is used to rank various projects.

Net Present value
Net present value (NPV) is a widely used tool for capital budgeting. NPV mainly calculates whether the cash flow is in excess or deficit and also gives the amount of excess or shortfall in terms of the present value. The NPV can also be defined as the present value of the net cash flow.

Mathematically,

NPV = ?(Ct / (1+r)t) - C0 , where the summation takes the value of t ranging from 1 to...

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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...

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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...

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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...

...Week 4 Discussion Question 1b
Introduction
Capitalbudgeting is one of the most crucial decisions the financial manager of any firm is faced with...Over the years the need for relevant information has inspired several studies that can assist firms to make better decisions. These models are assigned so that they make the best allocation of resources. Early research shows that methods such as payback model was more widely used which is basically just determining the length of time required for the firm to recover the outlay of cash and the return the project will generate. Other models just basically employed the concept of the time value of money. We have seen that more current models are attempting to include their analysis factors that might significantly affect the decision made by the manager (Cooper et.al, 2001).
Recent studies have shown that capitalbudgeting decisions are highly important and most times complex. There are several reasons associated with the use of capitalbudgeting. First, capital expenditures require the firms to outlay large sums of funds to initialize the project... Second, firms need to formulate ways that will generate and repay these funds that were initially outlayed. Finally, having a good sense of timing , when using this model is also very critical when making financial decisions. Several alternatives models are commonly used when...

...Capitalbudgeting 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 capitalbudgeting 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 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
• International risk
• Stand-alone risk
• Competitive risk
• Market risk
• Project specific risk
• Industry specific risk
CapitalBudgeting and Risk
Uncertainties can...

...CapitalBudgeting Technique
MGMT-3004-04 Financial Management
CapitalBudgeting Techniques
Capitalbudgeting is one of the most important decisions that face a financial manager. There are many techniques that they can use to facilitate the decision of whether a project or investment is worthy of consideration. The four that will be covered within this paper are Payback Rule, Profitability Index, IRR and NPV. Each method has its strength and weaknesses and they will be examined to determine which method is superior to the rest.
The first method to look at is Payback Rule. This rule is designed to show how long it will take to recover the cost of investment for the firm. This investment rule specifies a certain number of periods as a cutoff for determining whether to invest in a project. All investment projects where the initial investment cannot be recovered in specified cutoff period are unacceptable under this rule no matter what they provide past the cutoff. It is the easiest of all the methods to use and understand that will be reviewed. An example of this method is list in table 1. Now if we look at this table we find that if we use two periods as the cutoff then only Project B would be accepted for Project A does break even until year three. The problem with this method is that Project B breaks even but does not provide any income for the firm where Project A would...