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capital budgeting decision is whether to lease or buy an asset. - Essay Example
Author : rociogleason
Finance & Accounting
Pages 4 (1004 words)
Capital Budgeting Finance and Accounting College Name The Capital Budgeting Decision In the simplest of terms, capital budgeting decisions can be defined as the set of decisions according to which the firm decides the real assets to be acquired (Brealey, Myers & Marcus, 2001)…
It is very important to study all capital investments options that are available with the firm because of the long-term consequences. The simplest example of a capital budgeting decision is to decide if a firm should buy an asset or lease the same. Buying the asset will result in capital investments while leasing will lead to operational outflow. Capital budgeting methods In order to evaluate the capital budgeting options available with it, a firm can use many of the following ways: Net Present Value: Net present value is the cash the firm will need today as a substitute of making the investment of purchasing the asset (Ross, Westerfield, Jaffe, 2004). If the NPV is positive, this means that the firm will get that cash amount equal to the NPV. The calculation of the net present value takes into account the time value of money along with the cash flow associated with the project throughout the lifetime. A project should be pursued if the net present value is positive. Internal rate of return: This is the discount rate that makes the Net Present Value of a project zero. If the IRR of purchasing the asset is greater than the discount rate, the asset should be brought. Otherwise, the asset should be leased. ...