Introduction for Capital Budgeting
Introduction of Capital Budgeting
Capital budgeting is the process of identifying, analyzing and selecting investment project by a firm which the project expected will generate cash flows over one year. Each potential investment’s value will be estimated by using a Discounted Cash Flow (DCF) valuation in order to find its Net Present Value (NPV). All the incremental cash flows from the investment required estimating the size and timing by using this valuation. The NPV will influence by the discount rate, so select the proper rate such as hurdle rate. The hurdle rate is the minimum acceptable rate of return on an investment and important while making the right decision. This will reflect the riskiness of the investment especially measured by the volatility of cash flows. The decision to accept or reject a capital budgeting project depends on an analysis of the cash flow by comparing cash outflows and cash inflows. Capital budgeting is a long term planning for replacement of an inefficient equipment and/or additional equipment when business stable. Capital budgeting will decide when the firm is able to afford the purchase of the equipment. Capital budgeting involves setting expenditure for large investments per year. For example, purchasing costly plant and machinery, expanding or relocating the business premise, developing and launching a new product and etc. Many formal methods are used in capital budgeting, including the techniques such as Payback Period (PP), Net Present Value (NPV), Profitability Index (PI), Internal Rate of Return (IRR), Discounted Payback Period, Accounting Rate of Return (ARR) and etc. These methods use the incremental cash flows from each potential investment or project. Although economists consider the techniques based on accounting earnings and accounting rules are improper such as Accounting Rate of Return but sometimes we will use it. A capital budgeting decision rule should satisfy the criteria such as must consider all of the
Capital budgeting is the process of identifying, analyzing and selecting investment project by a firm which the project expected will generate cash flows over one year. Each potential investment’s value will be estimated by using a Discounted Cash Flow (DCF) valuation in order to find its Net Present Value (NPV). All the incremental cash flows from the investment required estimating the size and timing by using this valuation. The NPV will influence by the discount rate, so select the proper rate such as hurdle rate. The hurdle rate is the minimum acceptable rate of return on an investment and important while making the right decision. This will reflect the riskiness of the investment especially measured by the volatility of cash flows. The decision to accept or reject a capital budgeting project depends on an analysis of the cash flow by comparing cash outflows and cash inflows. Capital budgeting is a long term planning for replacement of an inefficient equipment and/or additional equipment when business stable. Capital budgeting will decide when the firm is able to afford the purchase of the equipment. Capital budgeting involves setting expenditure for large investments per year. For example, purchasing costly plant and machinery, expanding or relocating the business premise, developing and launching a new product and etc. Many formal methods are used in capital budgeting, including the techniques such as Payback Period (PP), Net Present Value (NPV), Profitability Index (PI), Internal Rate of Return (IRR), Discounted Payback Period, Accounting Rate of Return (ARR) and etc. These methods use the incremental cash flows from each potential investment or project. Although economists consider the techniques based on accounting earnings and accounting rules are improper such as Accounting Rate of Return but sometimes we will use it. A capital budgeting decision rule should satisfy the criteria such as must consider all of the