Capital Budgeting : Managing A Company And Its Finances

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EXECUTIVE SUMMARY According to Investopedia, capital budgeting is “the process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing” (Investopedia, 2015). Capital budgeting is very important topic when managing a company and its finances. It could cause a significant amount of damage or it could further solidify the company’s foundation in their respective field. Companies have a variety of ways to manage their money and projects, whether is through qualitative analysis or information. This analysis or information may come from the cash inflow/outflow and the company’s assets. This paper will outline various approaches used by businesses, whether large or small, in regards to capital budgeting. The approaches that will be looked at are NPV, IRR, PI, MIRR, and DPB. Companies use these measures to verify that they will proceed with the best project, with the least amount of risk, for them. There are many approaches that can be used, however many of them can be complicated and/or difficult to understand. The easiest approaches are NPV and IRR. This paper will go in depth into all of the approaches in hopes to determine which one is the best approach. The approach used by the company will determine its strategic direction and can dictate its success in the long run. Capital budgeting ideally means gathering all information available to make the best financial decisions possible. However, in order
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