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CAPITAL BUDGETING - Coggle Diagram
CAPITAL BUDGETING
Definition
decision making process of selecting and
evaluating long term investments
requires a firm to make decisions with respect to investments in fixed assets investments.
Importance
firms need to spend huge amount of money in order to stay in the industry
Right decision is needed with respects to the investments
the firm’s value increase, therefore will increase shareholders’ wealth
Types of capital investment
For expansion
Occurs when the company wants to introduce a new product
For replacement of existing assets
replacing an existing asset with a new esset
Safety and environmental project
types of projects
Independent projects
Mutually exclusive projects
Capital budgeting techniques
Payback period
Measures how quickly the firm can recover its
initial outlay
Liquidity indicator
Easy to calculate
Risk indicator
Internal Rate of Return (IRR)
Tries to determine the yield or the rate of return of an investment
Advantages of IRR
It recognizes time value of money
It uses cash flow
NPV-Using Formula
NPV is the present value of annual cash flow
minus Initial Outlay
It recognizes time value of money
It uses cash flow