Capital Budgeting
Capital Budgeting
QRB/501
July 25, 2013
On this paper the reader will be able to find the rationale in the analysis of a specific capital budgeting case study. Definitions along with explanations related to capital budgeting such as Internal Rate of Return (IRR) and Net Present Value (NPV) will be provided and debriefed. It is extremely relevant to mention that capital budgeting 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 is repaid at the rate established. We mentioned earlier that the other discounted cash flow technique was the IRR, let us define it so we can see the relation. According to www.princeton.edu (2013) “The Internal Rate of Return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments”. In more specific words it is the effective rate (interest) where the net present value of costs of the investments equals the net present value of the benefits of this investment. Both discounted cash flows techniques are used to make comparisons in flows of income that
QRB/501
July 25, 2013
On this paper the reader will be able to find the rationale in the analysis of a specific capital budgeting case study. Definitions along with explanations related to capital budgeting such as Internal Rate of Return (IRR) and Net Present Value (NPV) will be provided and debriefed. It is extremely relevant to mention that capital budgeting 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 is repaid at the rate established. We mentioned earlier that the other discounted cash flow technique was the IRR, let us define it so we can see the relation. According to www.princeton.edu (2013) “The Internal Rate of Return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments”. In more specific words it is the effective rate (interest) where the net present value of costs of the investments equals the net present value of the benefits of this investment. Both discounted cash flows techniques are used to make comparisons in flows of income that
References: Business Dictionary.com. (2013). Retrieved from http://www.businessdictionary.com/definition/net-present-value-NPV.html www.princeton.edu. (2013). Retrieved from http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Internal_rate_of_return.html University of Phoenix Capital Budgeting Case (2013). Retrieved from https://newclassroom3.phoenix.edu/Classroom/#/contextid/OSIRIS:42920011/context/co/view/activityDetails/activity/fbe198e8-2920-493d-bd44-1825fa744ef6/expanded/False/focus-cmt/none