Capital Budget Processes and Techniques

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Capital Budget Processes and Techniques
Investment decisions impact the long-term success or failure of a company. The capital budgeting theory assumes that the primary goal of a firm's shareholders is to maximize firm value. The process of analyzing and prioritizing investment opportunities is capital budgeting. Capital budgeting involves three basic steps of identifying potential investments, analyzing the set of investment opportunities that will create shareholder value, and implementing and monitoring the investment projects that a firm should undertake. Managers need analytical tools to help them make the best investment decisions for their firm. This paper will explore six different methods of evaluating investment projects and their advantages and disadvantages. The six methods are the payback period, discounted payback period, net present value, profitability index, internal rate of return, and modified internal rate of return, which method is most used in business, and issues related to capital budgeting.
Payback Period
The first capital budgeting method is the payback period. The payback period is the amount of time it takes for a given project's cumulative net cash inflows to recoup the initial investment (Graham, Smart & Megginson, 2010, p. 235). A company will determine what their payback period criteria are, and if that time frame is not met, the investment will be rejected. This is the simplest of all the capital budgeting decision-making techniques and
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