Capital Budgeting Techniques

Capital Budgeting Techniques

Financial and accounting are essential to assist in the decision of any business. Despite this, many entrepreneurs prefer not to give due importance to this type of information. They prefer to focus only on operational issues of the company and forget to take care of the financial health of it. The Balance Sheet, the Statement of Net Income and Cash Flow have much to say about a company and should not be treated only as obligations to be submitted to the tax authorities. These statements are all data that form a picture of the financial situation of your company and, on this basis; it is possible to draw new plans in order to increase profitability (Ehrhardt & Brigham, 2011). Profitability index, NPV, payback period and IRR are basically the tools and techniques that has been used in the industry for taking the Capital Budgeting decisions.

Part 1

Payback Period

Payback is the time between the investment and the initial time when the profit accumulated fluid is equal to the value of that investment. The payback can be nominal, if calculated based on cash flow with nominal values, and this liquid is calculated based on the cash flow values brought to the net present value. Any investment project has to start a period of expenditure (investment in) that follows a period of net revenues (net of costs for the year). Revenues recover invested capital. The period of time required to recover the revenue capital expenditure is the recovery period. The recovery period can be considered the cash flow or updated without the cash flow date. This is one of the techniques for analyzing investment alternatives to the method of the net present value (NPV). Its main advantage over the NPV is the payback takes into account the period of return on investment and, therefore, is more appropriate in environments of risk high. Investment implies immediate exit of money, however, is expected to receive cash flows that compensate this output over time. The payback is the calculation of the time (number of periods are months or years) required to recover the investment. It is mainly a criterion for risk assessment, and, in this perspective, the more attractive those projects to a recovery of capital invested in less time. Another way to consider the PB passes through establishing a certain timeout period, for which PB must be less or equal (Mahlia & Nursahida, 2011). For example, you can take the time horizon of the investment while limiting period.

When it is not possible to determine an integer check the condition of the accumulated cash flows are zero, the PB is equal to the number of periods whose sum is negative, the fraction between the added value of this sum and symmetric amplitude until the following sum, or is, is determined by linear interpolation. The pay-back gives us a measure of the time required for a project to recover the capital invested. It is applicable, without limitation, the conventional investment projects (Bakke & ...