Qrb Projections Essay

883 WordsMay 14, 20144 Pages
Capital Budgeting – NPV & IRR Analysis Student Name Course/Number Date Instructor Name Introduction Capital budgeting is the process of evaluating potential investment decisions using the tools of Net Present Value, Internal Rate of Return etc. and ranking the potential investment decisions in terms of potential benefits to the firm (Averkamp, 2014). As the resources of a firm are limited hence the objective of the capital budgeting process is to identify investment opportunities that will maximize the firm value. The purpose of the capital budgeting analysis is to see if the project's benefits are large enough to repay the company for (1) the asset's cost, (2) the cost of financing the project, and (3) a rate of return that adequately compensates the company for the risk found in the cash flow estimates. Net Present Value The Net Present Value of a project is defined as the present value of cash inflows from a project minus the present value of cash outflows from a project. The NPV approach is used to estimate the potential value of a project by using the discounted cash flow valuation technique. This essentially involves estimating the future cash flows from the project and then using the appropriate discount rate to obtain the net present value of the projected cash flows. The NPV rule thus takes into account the time value of money and is influenced by the size and timing of the cash flows as well as the discount rate used. The discount rate used in the NPV analysis should reflect the riskiness of the investment under consideration. NPV rule of project selection According to the NPV rule of project selection only projects which have positive NPV should be considered for selection purpose whereas projects with negative NPV should be rejected as negative NPV means the present value of cash inflows is less than the present value of cash

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