Capital Budgeting Essay

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A) Discuss capital budgeting. Why is it important for a business? Why is it important in my personal life? Discuss the methods that are used. What are some of the advantages and disadvantages of each model? Is the useful life of capital items getting longer or shorter? Explain. Capital budgeting is the process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. It is a tool or maximizing a company’s future profits since most companies are able to manage only a limited number of large projects at any one time. Capital budgeting usually involves the calculation of each project’s future accounting profit by period, the cash flow by period, the present value of the cash flows after considering the time value of money, the number of years it takes for a project’s cash flow to pay back the initial cash investment, an assessment of risk, and other factors. Ideally, businesses should pursue all projects and opportunities that enhance shareholder value. However, because the amount of capital available at any given time for new projects is limited, management needs to use capital budgeting techniques to determine which projects will yield the most return over an applicable period of time. Popular methods of capital budgeting include net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, is should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative. Pros of NPV 1) Accounts or the fact that the value of a dollar today is more than the value of a dollar received a year from now –

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