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Ch 10 Capital Budeting - Coggle Diagram

- - - - Make Investments
        
        Returns
  - - - The net present value method (NPV)
        
        The internal rate of return method (IRR)
- - - - Is the return on a specific investment opportunity great enough to justify the risk?
- - - - It considers the project life
      - It considers the time value of money
    - - The hurdle rate must be determined before you can do any project analysis
      - It doesn't indicate what rate of return a project is earning, only whether it is earning more or less than a specific hurdle rate
- - - - The sooner we recoup our investment amount, the lower the risk from things we can’t have predicted/projected/estimated in advance
        
        Furthermore, given the high cost of capital, the longer we have our initial investment tied up, the more costly it is for us
  - - - Investments with long lives will not be fairly measured against investments with shorter lives
      - It ignores the time value of money
        
        Given the high cost of capital, the more we have our initial investment tied up, the more costly it is for us
- - - - Takes time value of money into account
    - - Does not require determine the project specific hurdle rate in advance
  - - - A simple way to do this is to determine the internal rate of return on each project and then to rank the projects from the project with the highest IRR to the one with the lowest
        
        What is the weakness to this approach?
        
        It ignores the relative risk of each project
      - In this case, we wish to choose the best projects
- - - - There is no one way to do things the is always the best choice under every circumstance
      - KEY: Understand the costs and benefits of each method to determine which method or methods is most appropriate in each circumstance