Capital Budgeting Study Findings 2
Capital Budgeting Case
Richard Hughes
QRB/501
Robert Halle
Capital Budgeting Case
Our extensive research on two investment options yielded the decision that Corporation B is the company that our company has decided to acquire with a $250,000 initial outlay. We have conducted 5-year income cash flow projections. Our company determined the Net Present Value (NPV) as well at the investment’s internal rate of return (IRR).
When making a decision to purchase or invest in a company, a decision maker needs all the necessary information to fully understand what he is investing in. Investing carries a significant risk, and once the investment is made, there are several costs that are recoupable, called sunk costs. Examples of sunk costs are research and development (R & D) costs, and even the money spent on a scrapped project, no matter the amount. The larger the investment and the longer the time it takes to develop the project, the more important it is to be meticulous in researching the company or companies of interest.
A very important cost to take into consideration is the opportunity cost, which are forgone benefits of choosing one investment over another. For example, our company chose Corporation B to invest in so it cost us all the opportunities that we could have benefitted from choosing Corporation A. The company could have also chosen not to invest in any company, and put the $250,000 in an account that yields interest or returns.
The time value of money must be considered because of the opportunity costs that exist. Companies set a payback period threshold because they want to get their initial outlay back at a reasonable point and start making money. In capital budgeting this is called the payback period. The payback period does not account for the time value of money. When the time value of money is considered, it is called the discounted payback period.
Net Present Value compares the value of today’s dollars to what it would be worth at a certain
Richard Hughes
QRB/501
Robert Halle
Capital Budgeting Case
Our extensive research on two investment options yielded the decision that Corporation B is the company that our company has decided to acquire with a $250,000 initial outlay. We have conducted 5-year income cash flow projections. Our company determined the Net Present Value (NPV) as well at the investment’s internal rate of return (IRR).
When making a decision to purchase or invest in a company, a decision maker needs all the necessary information to fully understand what he is investing in. Investing carries a significant risk, and once the investment is made, there are several costs that are recoupable, called sunk costs. Examples of sunk costs are research and development (R & D) costs, and even the money spent on a scrapped project, no matter the amount. The larger the investment and the longer the time it takes to develop the project, the more important it is to be meticulous in researching the company or companies of interest.
A very important cost to take into consideration is the opportunity cost, which are forgone benefits of choosing one investment over another. For example, our company chose Corporation B to invest in so it cost us all the opportunities that we could have benefitted from choosing Corporation A. The company could have also chosen not to invest in any company, and put the $250,000 in an account that yields interest or returns.
The time value of money must be considered because of the opportunity costs that exist. Companies set a payback period threshold because they want to get their initial outlay back at a reasonable point and start making money. In capital budgeting this is called the payback period. The payback period does not account for the time value of money. When the time value of money is considered, it is called the discounted payback period.
Net Present Value compares the value of today’s dollars to what it would be worth at a certain