Blog Post - A Brief Overview Of The Techniques Used In Capital Budgeting

Background Information

The term capital budgeting contains two different concepts used in corporate finance around the world capital and budgeting. The word capital refers to the long term assets used in production, while budget is a plan that details the project cash inflows and outflows during some specific period. Thus capital budgeting is the whole process of analyzing the project and then decide which one to enter.

Capital Budgeting Techniques

Net Present Value

It is the difference between the present cash inflows of the project to the cash outflows of the project over the period of time. This technique is utilized in the capital budgeting all over the world for the purpose to examine the profitability of a project. While using this technique for the purpose to make investment decisions the firm should need to make investments only in those projects whose NPV is positive and higher as compared to the other projects appraised by the firm.

Internal Rate of Return

Internal Rate of Return is also referred to as IRR all over the world. IRR is the rate which equates the present value of the cash flows of the firm to the present value of the cash flows of the firm. The firm should need to make investments only in those projects whose IRR is higher but it is applicable only if when the firm makes decisions for the big projects. However, in case of small projects businesses needs to make investments only in those projects whose IRR is lower.

Payback Period

The payback period is the time required by the firm to recoup the funds of the firm that they expanded for the investment purpose in order to reach the breakeven point. The firms should need to accept only those projects which contain less payback period.

Though it would be easy for everyone to make decisions for the investment purpose through the application of these methods, it will never be easier for everyone to calculate the numbers by applying these techniques. It is necessary that those who face issues in the application of these concepts they require to contact with the best class assignment help online services. By contacting us, the students and the accounting professionals get the solutions of the concepts involved in the capital budgeting in a short period of time.

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