Decision Making Tools: Capital Budgeting

2149 WordsFeb 24, 20189 Pages
Capital budgeting is an important decision making tool that financial manager often uses to make in order to maximize shareholder value. It provides several methods of determining the most cost effective means of managing and investing shareholders money. It is an essential tool in decisions financial managers are required to make in their efforts to maximize shareholders value . (Parrino & Kidwell, 2011). Reliant upon the calculations that capital budgeting methods produce, firms search for investments and projects that will build their shareholder fortune. The search generally includes projects upfront investments coupled with an arrangement cash inflows. The most ordinarily utilized measures of capital budgeting are NPV, IRR, MIRR and DPB routines (Parrino & Kidwell, 2011). Different as they are in approach, each measure presents advantages and disadvantages when related to project assessment for capital budgeting. This paper will explain how the use of the Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period (PB) Profitability Index (PI), Modified Internal Rate of Return (MIRR) and Discounted Payback Period (DPB) methods are calculated and how they are beneficial to in the financial decision making process. Key words: Capital budgeting; Net Present Value; Internal Rate of Return; Payback Period; Profitability Index; Modified Internal Rate of Return; Discounted Payback Period; Chief Financial Officer; Decision making; Introduction Capital
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