Capital Budgeting : A Important Decision For The Any Organization 's Management

1434 WordsApr 26, 20166 Pages
Jaimini Patel 28th April,2016 Is Capital Budgeting One of the Most Important Decisions Management Can Make & Why Is This So? - by Paul Cole-Ingait, Demand Media In this article about the capital budgeting and how it is the most important decision for the any organization’s management. Capital budgeting, which is also called "investment appraisal". It is totally depending on the investment. Capital budgeting is the planning process which is used to determine an organization 's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is to budget for major capital investments or expenditures. Capital budgeting is the process of evaluating the…show more content…
NPV shows the difference between an investment’s present value of costs and its present value of benefits, and is calculated using a market-based discount rate. This valuation requires estimating the size and timing of all the incremental cash flows from the project. The NPV is greatly affected by the discount rate, so selecting the proper rate–sometimes called the hurdle rate–is critical to making the right decision. IRR- IRR shows the returns an investment is expected to generate during its useful life. The internal rate of return (IRR) is defined as the discount rate that gives a net present value (NPV) of zero. It is a commonly used measure of investment efficiency. The IRR method will result in the same decision as the NPV method for non-mutually exclusive projects in an unconstrained environment, in the usual cases where a negative cash flow occurs at the start of the project, followed by all positive cash flows. Nevertheless, for mutually exclusive projects, the decision rule of taking the project with the highest IRR, which is often used, may select a project with a lower NPV. Non-discounted cash flow methods -- payback period and average rate of return -- do not factor the time value of money. Payback period is the duration it takes to recover the initial capital of an investment Payback
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