Essay on Capital Budgeting
953 Words
Aug 30th, 2014
4 Pages
Capital Budgeting
Capital budgeting is a process where business executives plan about the future of their company. The company looks at potential investments, and they must decide if the investment is worth being funded by the company’s current capital. The process involves decisions that will affect the company’s long-term business structure. In our capital budget case we had to choose between two corporations that are available for sale. As executives, we must look at the most logical corporation to invest in. We have calculated the projected income statement and projected cash flow for the next five years. After evaluating that information we were able to view the net present value and internal rate of return. Based off the findings of …show more content…
Capital budgeting is a process where business executives plan about the future of their company. The company looks at potential investments, and they must decide if the investment is worth being funded by the company’s current capital. The process involves decisions that will affect the company’s long-term business structure. In our capital budget case we had to choose between two corporations that are available for sale. As executives, we must look at the most logical corporation to invest in. We have calculated the projected income statement and projected cash flow for the next five years. After evaluating that information we were able to view the net present value and internal rate of return. Based off the findings of …show more content…
The text also states the easiest way to understand the relationship between the IRR and the NPV value is to view it graphically. A net present value profile is a graph showing how an investment’s NPV changes as the discount rate changes. To graph an investment’s net present value profile, you simply need to determine the project’s NPV, first using a 0 percent discount rate, and next you must slowly increase the discount rate until a curve has been plotted. How does the IRR enter into the net present value profile? The IRR is the discount rate at which the NPV is zero. (Arthur J. Keown, 2014)
In the cases of Corporation A and Corporation B the best option concerning acquiring another corporation would be Corporation B. First there is a difference in the NPV whereas Corporation A is 20,979.20 at 10% and Corporation B is 40,251.47 at 11% based on the net present value. According to this analysis the NPV for Corporation B is greater than Corporation A which addresses the present money of today to the present value of money of the future. If the net present value of any project or investment is positive then only that investment is accepted otherwise it should be rejected, as the NPV is negative. If the NPV is zero then it is projected that it is positive. The NPV is the best technique available these days and is reliable concerning more accurate results. If the discount rate does
In the cases of Corporation A and Corporation B the best option concerning acquiring another corporation would be Corporation B. First there is a difference in the NPV whereas Corporation A is 20,979.20 at 10% and Corporation B is 40,251.47 at 11% based on the net present value. According to this analysis the NPV for Corporation B is greater than Corporation A which addresses the present money of today to the present value of money of the future. If the net present value of any project or investment is positive then only that investment is accepted otherwise it should be rejected, as the NPV is negative. If the NPV is zero then it is projected that it is positive. The NPV is the best technique available these days and is reliable concerning more accurate results. If the discount rate does