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Capital Budgeting Techniques Analysis

   

Added on  2020-03-23

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CORPORATE FINANCIAL MANAGEMENT
Capital Budgeting Techniques Analysis_1

The main basis on which an organization is established is based on the decisions made by itsmanagement. Hence, the process of decision-making has become an important part of thebusiness because even one inaccurate command may prove to become hazardous for the firmresulting in huge losses in profit and status of the firm. Before coming to the conclusion of anycase we should examine all the major factors which may affect the goal of the management.Therefore they should choose the most appropriate option in order to achieve their desiredresults. The decision-making process is having a main objective of accomplishing the 'goals' andit is also a continuous process because of the dynamic nature of the business environment whichleads to change in plans because of new problems arising with a change in time (Berman, Knightand Case, n.d.).There are different levels of the firm at which the corporate decision-making takes place like-bottom up or top down. The executer characterizes the corporate decision-making as the decisionwill be most appropriate only when it is taken effectively. Also, if there is no commitment fromthe lower or middle management, the large laid plans may become useless which may lead tofailure of the management system. It is therefore important for the management to maintain aprospering and healthy relationship with intermediate and low-level management. Therefore,business decision-making is successful, as long as there will be ”glue” which will help the firmto be organized and also will lead to encouragement of the leaders who maintain stability in thebusiness values, otherwise the entity will fall into their own trap, leading to the loss ofcompetitiveness of the market (Bruner, Eades and Schill, 2017)..Capital budgeting refers to the assessment of the various costs or investments with properties ofhuge nature .These costs or investments include the creation of new plants or long-terminvestments (Clarke and Clarke, 1990). It helps in determining lifelong cash inflows andoutflows to assess whether favorable returns are incurred by the firm to accomplish the set goalsor benchmark and thus it is also called “investment appraisal”.For an enterprise, it helps to facilitate the use of all opportunities and projects, but because of thelimited availability of capital at a particular point in time, management uses the technique ofcapital budgeting to determine the maximum return on all available assignments at a time(Fairhurst, 2015).There are various methods of capital budgeting which includes net present value (NPV), internalrate of return (IRR), discounted cash flow (DCF) and payback period. This can be explained asfollows:NPV: There is a discrepancy between the present values of both the cash inflows andoutflows which is used in capital budgeting to find the profitability of the project or long-term investment. A positive value of NVP indicates that the expected return exceeds thecost whereas a negative value indicates a loss in the business (Galbraith, Downey andKates, 2002). For example- If there are two assignments A and B, and both have different
Capital Budgeting Techniques Analysis_2

structures of cash flow, also the required rate of return is 10.25% then the NPV of thecash flows will be shown as follows:ProjectA YearCashFlow0-90000125000224000326000427000530000Required rate of Return 12%NPV ofProject AYearCashFlowPresent Value of Cash Flows0-90000 -90,000 12500022,321 22400019,133 32600018,506 42700017,159 53000017,023 NPV4,142
Capital Budgeting Techniques Analysis_3

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