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Pros and Cons of Capital Budgeting Measures
Finance & Accounting
Pages 7 (1757 words)
PROS AND CONS OF CAPITAL BUDGETING MEASURES Name Professor’s name Course Date Executive Summary Organizations have to do investment appraisal before undertaking long-term projects in order to determine the feasibility and profitability of their investments.
Examples here include the payback period and the accounting rate of return. The other techniques employed in the evaluation of projects are the discounted methods of appraising capital projects. In these methods, the future expected cash flows are discounted at the organizations cost of capital to determine the projects’ to be undertaken. In this approach, only projects with positive net present value will be undertaken in order of their profitability. The idea of capital budgeting before investments are undertaken is necessitated by the need to avoid incurring losses and to maximize the returns of a firm at the lowest cost possible. The budgeting process is also necessary because of the capital constraints that companies face. Due to capital inadequacy, companies and firms will not be in a position to undertake all the projects and therefore creating the need to only undertakes the most profitable investments (Baker, 2011). Failure to undertake capital budgeting process may cause organizations to realize heavy losses and have going concern problems. In this paper, discussion has made on the pros and cons of the methods of NPV, IRR, MIRR and discounted payback method. I would prefer the use of NPV and IRR methods of capital budgeting in instances that we have independent projects with equal sizes. ...
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