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Capital Budgeting Techniques

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Capital Budgeting Techniques

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  • August 5, 2008
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ABSTRACT

This report describes capital budgeting techniques such as NPV (The NPV of an investment is the difference between its market value and its cost, IRR (The IRR is the discount rate that makes the estimated NPV of an investment equal to zero. PAYBACK (The payback period is the length of time until the sum of an investment’s cash flows equals its cost), discounted payback period (The discounted payback period is the length of time until the sum of an investment’s discounted cash flows equals its cost).

There are some notable differences between capital budgeting processes in developing and developed countries. Canadian firms tend to formally evaluate all investment opportunities, while US managers do a thorough analysis of only he large ones. In conclusion, the developing countries like Cyprus, and Pakistan, for the most part, do not follow scientific evaluation techniques for their investment projects probably due to lack of familiarity with such methods. From this research of developing countries it seems that the same trend is followed in all developing countries. These findings indicate the need for training and educating the managers of the firms in the capital Budgeting area of financial management. As for as developed countries are concerned they do use capital budgeting techniques.

INTRODUCTION

This report attempts to ascertain which criteria managers of developing countries like Cyprus and Pakistan and developed countries like USA and Canadian firms employ in capital budgeting decisions and whether these criteria differ between these countries. The capital budgeting analysis techniques we examine include IRR, NPV, Pay back Period, MIRR; because most managers use more than one method of evaluation. The first part of the report explains the meaning of budget and capital budgeting, definition of various techniques used in capital budgeting the second part shows the different capital budgeting processes used by developing and...