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Capital Budgeting - Coggle Diagram
Capital Budgeting
Capital budgeting techniques
Profitability Index (PI)
Non-discounted cash flow methods
Payback period
Discounted cash flow methods
Net present value (NPV)
Internal rate of return (IRR)
Types of Capital Investment
For expansion
Occurs when the company wants to introduce a new product, to penetrate into new market, to open up new branch or increase production capacity by buying more machines
For replacement of existing assets
A company is replacing an existing asset with a new asset.
Old machine will be disposed off
Safety and environmental project
IRR
In other words, will determine the return that will make the NPV = 0 or > 0(positive)
Tries to determine the yield or the rate of return of an investment/project
Decision criteria
Accept – both project if IRR for both projects > than required rate of return (cost of capital)
Accept the projects with the highest IRR
Payback period
Measures how quickly the firm can recover its initial outlay
Decision Criteria
Accept – if its payback period is less than or equal to the firm’s maximum desired payback period
Accept the projects with the shortest payback period
Type of project
Independent Project
Mutually exclusive project
Define Initial Outlay
Called as initial investment
Refers to the immediate cash outflows required by a firm to a start a project
Is a decision making process of selecting and evaluating long term investments