Concept explainers
To make capital budgeting decision, it is required that the asset and or projects are properly evaluated. This is done as follows:
Estimated the cash flows which is expected to be generated from the project or asset
Evaluate the riskiness of the project and determine an appropriate discount rate specific for the project
Determine the present value of all the expected cash flows, this is done by using the below equation
Here,
Expected net cash flow in Period t is “
Required
Now, compare the present value of future expected cash flows with the cost of the project. If the present value of
A project will cost $42,000 and generate $11,000 for next 5 years. Required rate of return is 9%.
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