Capital budgeting practices in German

Running head: CAPITAL BUDGETING TECHNIQUE
CAPITAL BUDGETING TECHNIQUE
Name of the Student
Name of the university
Author Note:

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CAPITAL BUDGETING TECHNIQUE
Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................3
Answer to Question 3......................................................................................................................3
Answer to Question 4......................................................................................................................4
Reference.........................................................................................................................................6

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CAPITAL BUDGETING TECHNIQUE
Answer to Question 1.
An organization has to make certain decisions regarding its investment or its expansion
so that the organization can forecast the result or effectiveness of such investment (Rossi, 2015).
In such cases, the organization needs to calculate the NPV of the inflows and make a decision on
that basis. So, Net Present Value (NPV) is the variance between the present value of cash flows
received over a period of time and the present value of cash outflow. The cash outflow is the
initial investment that is made on the project, and it may include expected negative inflow to be
received in the future (Leyman & Vanhoucke, 2016). The values of the cash inflows can be
derived at present value with the help of discounting factor rate which can be derived
considering the rate that is applicable with the investment having similar risk. A positive net
present value shows that the earnings from the investment will be higher than the anticipated cost
on the investment and vice versa.
The total of all the cash flows expected to be received in future will be converted into
present value using the discounting factor, and if the NPV is equal to or more than zero project is
acceptable, while if it is adverse or less than zero, then the project should be not be accepted.
This is the simple benchmark to be used while using NPV.