Capital Budgeting

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Capital Budgeting



Capital Budgeting

Introduction

One of the aspects of financial management explains the relevance of adequate decision making and accurate allocation of funds in various projects necessary for the successful business operations that yields back desired returns on these investment projects over a given period of time. The capital budgeting is an approach that is widely used in field of fiannce to evaluate the given set of projects with respect to its viability, allocation of funds, rate of return, and net worth. There are many sophisticated approaches for analyzing the capital budgeting process and it is also suggested that there are certain risk associated to these processes (Arnold & Hatzopoulopus, 2000). The apprasing techniques that will be evaluated in the given assignment are net present value, pay back period, and internal rate of return with respect to two different projects by corporate A and B.

Discussion

The pay back period method is used for calculating the number of years or time period required to recover the initial investment. As per our analysis of given cash flows yielded from corporation A, the payback period is estimated to be 0.20. The payback period of corporation B'ss cash flows is estimated to be 0.40. With respect to this result, we can say that corpoaration A's project is more feasible as compare to corporation B because the project by Corporation A has the capability of recovering the initial expenses of -20,000 that increases by 15% every year is yielded back in small time period. However the main issue with this method is that it igores the cash flows that incur after the desired desired pay back period.

The NPV method shows the present value and the stream of negative or future cash flow data. This method takes into account all the flow of cash and the outracing of an assets for the information technology business project (Arya et.al.,1998). This method produces the net worth of the project by undertaking expected future cash flows, discount rate, initial cash outflow or initial investment, and projected time period. The method suggests that a project should only be undertaken if it gives positive net present value and it should be rejected in case of negative NPV. The net present value of project by corporation A is estimated to be $434,545.45 at the discouting arte of 10%. The net present value of the project by corporation B is estimated to eb $580,126.51 ...
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