Capital budgeting and investment decisions

According to Attrill and Mclaney, 2009, there are four (4) approaches to capital budgeting. The net present value (NPV) is one of such and is a summation of all discounted cash flows(Present Value) associated with whichever project(s) are undergoing appraisal. Every appraisal method have decision rules, examples include the Payback Period(PBP) which stipulates the approval of projects that pays back the initial investments within a specific period. For this method (Net Present Value) to be most effective, from the pool of prospective projects under review, only projects that produce a positive net present value should be undertaken, and projects that produce negative figures should be ignored and in instances where mutually exclusive projects are involved, management should thus undertake the project that generated the highest positive net present value. There are however two types of projects that can be undertaken, these are independent projects that are not affected by the cash flows of other projects, and on the other hand is the mutually exclusive projects that means that there are two ways at accomplishing same results.

Investment involves making an outlay of something of economic value, usually cash, at one point in time, which is expected to yield economic benefits to the investor at some other point in time. (Atrill and Mclaney, 2009). Among all the methods of appraisals and despite the fact that this method is however more difficult than the other methods to calculate, the Net Present Value represents the most logical approach, business owners and investors can utilize when making an investment decision / during capital budgeting. When compared to other methods of project appraisal, it particularly stands out.The essential feature of investment decisions is time, (Atrill andMclaney, 2009) and this method particularly recognizes the importance and calculates the time value of money, furthermore, this method measures in absolute terms, the