StudentShare solutions

# Capital budgeting decision is whether to lease or buy an asset - Essay Example

## Extract of sample Capital budgeting decision is whether to lease or buy an asset

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. ...
Profitability index: The profitability index ratio is an indication of the cost associated with the project viz-a-viz the initial investment made. The ratio can be calculated as: Accounting rate of return: Accounting rate of return is the rate of return that is generated from the proposed capital investment. Each method has its own advantages as well as disadvantages. While NPV calculation is based on too many assumptions including that of the future cash flows as well as the return on equity. The calculation is also based on the premise that the cash flows generated are invested back at the discounted rate which is not a realistic assumption. The internal rate of return calculation assumes that the returns from the project are re-invested in the project. However, this might not be true in most of the cases. In addition, if the project has multiple positive and negative cash flows, it may have several IRRs. As a result of this, firms shall use modified internal rate of return (MIRR), which is the discount rate that makes the investment equal to the future value of the cash flows from investment (Kierulff, 2008). The actual method used for capital budgeting decisions differ from firm to firm depending upon the size of the firm, the rate of growth of firm and leverage of firm amongst others. Graham and Harvey (2000) in their paper “The theory and practice of corporate finance: Evidence from the field” indicate that net present value and internal rate of return are the most popular methods used for capital budgeting decision methods. They also concluded that there is no dependence of the method used on the growth rate for firms with smaller debt ratios. Large firms are more frequent user of NPV as compared to smaller firms. Public companies are more likely to ...Show more

## Summary

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)…
Author : rociogleason
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Capital budgeting decision is whether to lease or buy an asset"
with a personal 20% discount.
Grab the best paper

### Check these samples - they also fit your topic

A Capital Lease
A capital lease is a lease in which the lessee gains ownership at the end of the contract. The four criteria to determine whether a lease is a capital lease are: 1. The lease transfers ownership of the property to the lessee 2. The lease contains a bargain purchase option
3 pages (750 words) Essay
Capital Budgeting
Topic: Capital Budgeting Name: Course: Instructor’s Name: Date: In recent past, capital budgeting has gained popularity as of the main functions of management. Capital budgeting refers the selections of the projects that will yield higher the returns of the company.
2 pages (500 words) Essay
Capital Budgeting
Also, capital investment involves both stock investments and bond contracts. Bond contracts are loans to creditors that are usually paid in monthly or quarterly installments. illiquidity How should responsible business managers use these concepts Is there a connection between them, and if so, what is this connection Each of the two pairs of concepts is complementary--each pair forms a whole.
20 pages (5000 words) Essay
Capital Budgeting
In order to be effective both financial and non-financial measures must be able to motivate the managers and employees at various levels of the organization so that the organizational goals can be achieved. Performance evaluation and rewards are the major drivers for effectively motivating individuals in a firm.
13 pages (3250 words) Essay
CApital budgeting
reduces the risks attached to the products, internal integration improve the productivity of organization continuous experimenting not only improve the value creation but also enhance the image of the organization in business. These investments are very important for the
10 pages (2500 words) Essay
Real estate and capital structure decisions- Lease versus Buy Analysis
One significant factor is the stability and probability of company expansion. To achieve a clearer view on this, research and study to determine feasibility is suggested. It will not
8 pages (2000 words) Essay
Capital budgeting
Accounting rate of return is one of the simplest techniques for evaluating investments, though not widely applied. It works by determining the return which arises from profits generated from an investment. The main drawback of this method is that it does not take into account the time value for money.
3 pages (750 words) Essay
Capital Budgeting
The NPVs include Canadian NPV Project Prospective, and Canadian NPV Parent Prospective RPP. Relative Purchasing Power (RPP) NPV can be used for the long run due to its far-reaching relevance compared to NPV from the
4 pages (1000 words) Essay
Capital Budgeting
The method is best used in situations where there are varying lifespans of different projects. The method is considered to provide a good comparison between two different assets since it uses the
2 pages (500 words) Essay
Capital budgeting
Of the three techniques namely; NPV, IRR, and payback period, the most useful tool to use in project valuation is the NPV. Unlike IRR and Payback techniques, the NPV is a very accurate tool that helps to determine if the project will be
2 pages (500 words) Essay
Hire a pro to write