Capital Budgeting, Net Present Value and other Decision Tools



Executive Summary

Capital budgeting is one of the key areas of decision-making in the company. Investment decisions related to the current assessment of the effectiveness of future operations. This means that at present the company's management must evaluate the market conditions in the future, both for revenue and expenditures and adjust to the prediction of its activities taking into account the strategy adopted and the possibility of technological, organizational and financial. Errors in the allocation of capital are expensive. Capital involvement in activities with low efficiency results in a smaller increase in goodwill than it is potentially possible. Thus increasing the threat of competition running more efficiently and in extreme cases can lead to a reduction of goodwill.

This has been proved by the case of AES which were cosnidering the same discunt rate for tehir entire operations and hence, did not take into the consideration that NPV also has a huge impact on the success of the organization. As we have already discuss the advantages and disadvantges of the capital budgetuin techqiues, CAPM would be better advice In other words, it requires planning for the implementation of budgets on projects expected to have long term consequences. The use of CAPM can be used as an alternative models which can incorporate information related to the situation more comprehensively The companies should also go for hedging to protect itself against several risks. Hedging is the position taken in a particular market in an attempt to compensate for the exposure to fluctuations in market prices in the last in order to reduce exposure to risk unwanted.

Capital Budgeting

Introduction

Investment and financing decisions are among the largest decisions of any business as they undertake the long term investment choice. Company's goal is to create value, that is to say, to increase its own value and therefore that of shareholder wealth. To create value, it must identify, on the resources available, a rate of return at least equal to that required of its funders.

Objective of the Research

The objective of this research is that the capital budgeting is the main source on basis on which companies make decision for further expansion. Furthermore, Capital budgeting have considerable affect on financial performance of the companies and any mistake in this decision could leads the company to suffer huge loses.

Discussion

Literature Review

The Capital Budget is a tool used for the costs planning process for the assets of the company, whose economic benefits are expected to extend in terms of more than one fiscal year. The capital budget is a list of projects valued presumed to be achievable for the acquisition of new fixed assets, i.e. when a company makes an investment commodity incurs capital output current cash, hoping to change future benefits (Ryan, 2002).

Capital budgeting Techniques

The basic methods for ranking investments or to determine what accepted or rejected are:

NPV - Net present Value

IRR - Internal Rate of Return

PI - Profitability index

MIRR - Modified Internal rate of return

DPB - Discounted ...