Capital Budgeting Decisions
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This paper addresses how financial managers make the tough decisions between interesting and profitable projects for a corporation to invest in. The paper presents a two-part case study. Part I addresses the purchase of new equipment. It presents an analysis, using net present value (NPV), internal rate of return (IRR) and payback and discusses how to determine if this new machine purchase is one that the company should pursue. Part II discusses what method (NPV or others) is the best method to use for capital budgeting purposes.
Table of Contents:
Table of Contents:
From the Paper:"If two investments, X, and Y, are mutually exclusive, then accepting one of them means we cannot accept the other. Given that, a question always arise, as to which one is best? The answer is simple though: the best one is the one with the largest NPV. Can we also say that the best one is the one with the highest IRR? The answer is no. As we have stated earlier, the IRR is biased towards projects with higher initial cash flows, hence the IRR would be higher for those projects whose initial cash flows are higher, yet that does not necessarily mean that those projects would have the higher NPV. Here, we must consider a very important point: the bottom line for any capital budgeting decision is accepting the project that would create the highest added value for shareholders, hence the higher the NPV, the more attractive the investment (Ryan, 2002)."
Sample of Sources Used:
- Patricia A Ryan and Glenn P Ryan, Capital budgeting practices of the Fortune 1000: How have things changed?, Journal of Business and Management. Fort Collins: Fall 2002. Vol.8, Iss. 4; pg. 355, 10 pgs, downloaded on 23 May 2007
- Capital budgeting needs vision, Business line. Islamabad: Jul 21, 2003. pg. 1
- Lefley, Frank. Modified internal rate of return: Will it replace IRR?, Management Accounting. London: Jan 1997. Vol. 75, Iss. 1; pg. 64, 2 pgs, downloaded on 23 May 2007.
- The Top 10 Things To Consider When Making A Capital Budgeting or Investment Decision, Category: Future, Strategic Planning, Leverage Opportunities (AI19), Originally Submitted on 7/10/97, downloaded on 23 May 2007
Cite this Case Study:
Capital Budgeting Decisions (2007, November 25) Retrieved November 21, 2014, from http://www.academon.com/case-study/capital-budgeting-decisions-99726/
"Capital Budgeting Decisions" 25 November 2007. Web. 21 November. 2014. <http://www.academon.com/case-study/capital-budgeting-decisions-99726/>