Capital budgeting analysis

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Capital Budgeting Analysis reading report
Agency theory and forms of business organizations reading report


Reading report

Capital - refers to long-term assets used in the creation of goods and services.

A budget- a plan that details projected cash inflows and cash outflows during some future period.

Capital budget- is the planned investment in assets and the financing for such assets

- is the process of evaluating projects and making a decision which ones to include in the capital budget.

Importance of capital budgeting

  1. It is important to ensure that viable projects are selected.

  2. Timing of acquisition of capital assets.

  3. Enables the firm to make funds available for the project the firm is undertaking. Capital Budgeting Methods

    1. Payback

    2. Discounted payback

    3. Net Present Value (NPV)

    4. Profitability Index (PI)

    5. Internal Rate of Return (IRR)

    6. Modified Internal Rate of Return (MIRR)

  1. Payback Method

Payback period is the length of time it takes to recoup the initial investment or the amount of time required for an investment to generate cash flows sufficient to recover its initial cost

The payback rule is to accept an investment if the calculated payback period is less than some prescribed number of years.

Payback period = Full years before recovery + Unrecovered cost at the start of the year
Cash flow during the year

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