# Capital Planning And Budgeting For The Future Of An Organization 's Long Term Plans

1055 WordsJul 27, 20155 Pages
Capital Planning & Budgeting Brent Ours American Intercontinental University Unit 1 Individual Project FINA320-1503-01 Jeffrey Hardin 7-26-2015 Abstract Capital Planning refers to the process of budgeting resources for the future of an organization 's long term plans. Capital planning includes budgeting for new or replacement machinery, research and development of new products, new plants and other major capital expenditures. Based on provided variables the Net Present Value (NPV) and Payback Periods will be calculated. A capital budget will be present whereas decisions can be made whether to accept or reject these projects. Projections will be made based on four-year time frame. Capital Planning & Budgeting The director of…show more content…
Capital Budgeting is the use of existing capital for the purpose of increasing the long term returns of the concern. Capital budgeting reimbursements accrue in future therefore reservation accompanys every undertaking. FINA320 Unit 1 IP.xlsx Pay Back Period Payback period can be defined as the anticipated number of years needed to recuperate an original investment. Payback indicates number of years an invesment takess to return the actual cash outflows or investment. Pay Back Period = Initial Investment / Annual Cash Inflows When deciding whether to accept or reject a project: accecpt when the payback period is below the maximum payback period set by the organization. With numerous projects, importance is given to the project with the lowest payback period. Net Present Value The Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. To calculate the NPV use the formula: NPV = CF₀ / (1+k) ^0 + CF₁ / (1+k) ^1 + …….CFn / (1+k)^n + CFt / (1+k)^t - CO₀ Where, CFt = Cash flow occurring at the end of year t. A cash outflow has a negative sign. n = Life of the project k = Cost of Capital (obligatory rate of return) used as the discount rate Decision criterion in NPV method: In this method any project with a positive NPV is accepted. That is the NPV of all the projects are calculated and the project with highest NPV is selected amongst them. Internal Rate of