Trends In Capital Budgeting

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art A: Capital budgeting is the technique of researching investment opportunities in non-current asset which are predicted to be able to produce economic benefits for more than a year (Peterson and Fabozzi, 2002). 2.1 Trends in capital budgeting decision techniques A series of studies have researched on the capital budgeting practices of various companies over the past five decades. More than ten years has passed since the most recent study. This shows that there is a large gap from the latest study in 1999 to the present. More current studies exist for Australia, the UK and US (Arnold and Hatzopoulos, 2000; Burns and Walker, 1997; Farragher et al., 1999; Graham and Harvey, 2001; Ryan and Ryan, 2002; Truong et al., 2008). The insufficiency…show more content…
With net present value, the present value of future cash flows is generated and is used to compare with initial outflows to determine if an investment project is seen as profitable, a positive NPV is the outcome indicated is deemed acceptable. Internal rate of retune is a percentage that links the present value of future cash inflows with the present value of its investment expense. Finance theory infers that net present value is a better method to evaluate capital investment projects. In a common project, cash outflows are followed by annual cash inflows and under such, net present value and internal rate of return will lead to a similar investment decision. Problems with the internal rate of return technique happen in two different scenarios and thus has the possibility to lead to an incorrect capital budgeting decision. When projected cash flows appear to be abnormal this may lead to different internal rate of return calculations, affecting the decision-making in both independent and mutually exclusive projects. When the investment projects are mutually exclusive, scale and time differences may lead to incorrect investment decisions and this is a problem associated with the reinvestment rate…show more content…
The payback method is one of the techniques used in capital budgeting that does not consider the time value of money. payback only answers one question: How long before the cash invested is returned? Payback does not address which investment is more profitable. Payback not only ignored the time value of money, it ignored all of the cash received after the payback period. The payback period model determines the length of time required to recover exactly the invested cash outlay. On the other hand, the accounting rate of return is calculated as the ratio of the investment’s average after tax income to its average book value (Cooper et al., 2002). The payback period has been attacked for incapable of making accurate prediction of future value because it does not consider time value of money, use of cash flows and it does not help to select investment projects that can maximize profitability, therefore the payback period method does not have theoretical base. Research scholars and practitioners criticized the accounting rate of return due to the lack of consideration of the time value of

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