Capital Budgeting Essay

716 Words 3 Pages
Over the last few years, significant changes have occurred in the financial markets. This has created a more competitive financial world. Financial improvements have played a major part in the growth. The demand in the market has resulted extreme regulation, guidelines in order to accommodate the influx. There are several issues that are associated corporate finance. The amount of consolidation of accounts, mutual provisions between debtors and creditors, and paying deposit necessities no longer misrepresent financing arrangements when net financing is the emphasis. With this, we are able to see that capital budgeting provides outline for businesses to plan out future long-term arrangements. Businesses regulate the long-term cost-effectiveness …show more content…
With the payback period, a company will establishes a suitable amount of time that an investment can repay the cost of capital. Payback period is easy to utilize and understand. Primarily, if the investments payback period is long then it is rejected and the investment is within relevant range then the investment may be suitable. More so, this method is effective in measuring small investments with little risk. Unfortunately, the payback period does not take in to account the time value of money and the irregularity of inflows from the project original …show more content…
By determining the weighted average cost of capital over time or discount rate, a company can appraise the current value of the expected cash flow from an investment of capital. By comparing this net present value of two or more possible uses of capital, the opportunity with the highest net present value is the better alternative. A positive NPV indicated the project should be accepted. An advantage of the NPV method is the ability to determine if the project will increase your firm 's value and will also indicate when the project will produce a return and its significance. The downfall to NPV is the guestimate the dollar amount of the project and the project could potentially incur a negative

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