Essay about Capital Budgeting

2594 Words Apr 14th, 2014 11 Pages
Capital Budgeting
Introduction
Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the firm's goal of maximizing owner wealth. A firm using capital budgeting, their goal is to see if there fixed income will cover itself for profit. Fixed incomes are things such as land, plant and equipment. When a firm using a machine to produce its good or service. They most of the time what the machine to produce the amount that they paid for the machine and more. The capital expenditure is the outlay of fund that a firm expects to produce and benefit with in a one year.
The Capital Budgeting Process
When approaching the problem of trying to the measure capital budgeting. The first step in
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When determining projects incremental cash flows. The suck costs are cash outlays that have already been made and have no effect on the cash flows.
The opportunity costs are cash flows that could be realized from the best alternative use of an owned asset.

Net present Value (NPV)
The NPV gives explicit consideration to the time value of money. The NPV is considered a sophisticated capital budgeting technique. The NPV is measured by subtracting a project's initial investment from the present value of the cash inflows discounted at a rate equal to the form cost of capital. The NPV measures inflows and out flows. When putting your input in to the chart. The chart requires the amount of years that the firms think it will take to retrieve its investment. The input of the out flow is entering in to the charts as a negative. The reason why the number is entered as a negative is because that is the amount of money the firm is giving out to pay for the machine.

INPUT
LIFE OF PROJECT
5

DISCOUNT RATE/ REQUIRED
RATE OF RETURN (i) 8.000%

CASHFLOWS ($$) (58,300.00) 19,080.00 15,900.00 26,500.00 10,600.00 8,480.00

YEAR 0.00 1.00 2.00 3.00 4.00 5.00

Recaptured Depreciation
Recaptured depreciation is the portion of an asset's sale price that is above its book value and below its initial purchase price. When a firm uses this method they are simple taking an old machine and selling it for more then the current worth. We will now look at an

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