Capital Budgeting Is An Investment Appraisal Essay

2131 WordsNov 2, 20169 Pages
Capital budgeting is an investment appraisal, and is the single most important decision made by a company’s finance and exec team. It is the planning process used to determine whether an organization 's long term venture(s) are worth the investment through the firm 's debt, equity or retained earnings. One of the primary goals is to increase the value of the firm to the shareholders. “The process of capital budgeting involves analyzing, evaluating and deciding whether resources should be allocated to a project (Lowengrub session 6 slides)”. Several methods to evaluate incremental cash flows from each possible investment option. Net present value, expressed as is the method used to compare the present value of cash inflows to cash outflows. A positive NPV specifies that the projected incomes from the investment surpasses the estimated costs. Typically, in this case, a positive NVP will show a good ROI and if vice versa, will yield in a loss, therefore a project should be accepted with a result of a positive NPV. The Internal Rate of Return compares the firms cost of capital to the rate-of-return that makes the net cash flows from a project equal to the project’s cost (Lowengrub, 2016). The IRR is the interest rate at which the NPV of all the cash flows from a project equal zero. If the internal rate of return of an investment/project surpasses a company’s required rate of return, that project could be accepted. The modified internal rate of return is a

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