Fin 370 Week 3 Dq2

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Week 3 DQ 2 What is capital planning? Why is the internal rate of return important to an organization? Why is net present value important to a project? How do you select from multiple projects presented to your organization? Capital Planning, also known as Capital budgeting, (or investment appraisal) is the planning process used to determine whether a firm's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures. IRR, Internal Rate of Return helps organizations figure out what the rate of return is on individual projects; what the project earns. This is important to companies as it helps gauge which projects to accept or reject. To accept a project, the IRR is equal to or greater than or equal to the required rate of return. If the IRR is less than the required rate of return, then it is rejected. IRR is important to organizations as it’s typically in line with the goal of maximizing shareholder wealth. The NPV is the Net Present Value. NPV can be defined as a capital-budgeting decision criterion defined as the present value of the free cash flows after tax less the project’s initial expenditure. This gives an indication of the net value, by terms of today’s dollar value, of an investment proposal. This is an additional method to help businesses make the decision to accept or reject a project. If the projects net value is greater than or equal to zero, the project is accepted. When it is less than zero, this determines rejection of that project. Depending on the scope of the projects and organization, I would recommend either one of these methods to review the eligibility of projects. However, I would prefer the IRR as percentages are regularly easier to comprehend and apply. Yet, I wouldn’t rule out NPV, and

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