Capital Budgeting : An Important Tool

842 WordsNov 5, 20164 Pages
Abstract Capital budgeting is the process of regulating the possibility of a project to take an extended period investment on purchase or replacement of property plant and equipment, new product line or other projects. Capital Budgeting is an important tool, which helps financial managers to select investments with adequate cash flows and rate of returns. The financial manager can use different techniques of capital budgeting such as Net Present Value, Adjusted Present Value and two other business valuation models that are popular, Payback Period and Accounting Rate of Return. All these techniques are on the comparison of cash inflows and outflow of a project. However, they are considerably different in their approach. How Adjust Present Value (APV) differs from Net Present Value (NPV)? Capital budgeting refers to the decision-making process for long-term projects investments. This process uses various methods, and some of the most traditional methods are below. Adjusted Present Value Adjusted present value (APV) refers to the Net present value (NPV) of a capital investment if financed by equity plus the financing benefits of present value (PV). It is very useful for transactions that are highly leveraged. The method is also especially effective in situations where the tax implications of a deal significantly affect the outcome of a leveraged buyout (Hansen, 1998). This method of valuation is new when compared with other standard methods. Adjusted Present Value
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