Analyze Capital Budgeting Methodologies (NPV, IRR, MIRR, etc..) - Research Paper Example

Some of the major capital budgeting techniques are: 2. Where “NPV” is “zero”, it is acceptable to the organization as it promises equal return to the required rate of return. However, the organization is in differential towards such a project, as it gives no profit. This technique uses discounted cash flows in its analysis, which makes it one of the most accurate capital budgeting techniques. This is because it incorporates and considers both the risk and time variable aspect of the project.

Therefore, it measures the net benefit of the project in today’s currency terms (Accounting4managment, n.d). One of the major limitations of NPV method is its difficulty to make accurate forecast of the future cash flows and another is its vulnerability of manipulation through different discount rates as there is no standard to set a discount rate (Michel, 2001). Internal Rate of Return or also called yield on project is actually the rate of return of the investment project earned over the useful life of the project.

The benefits and cost of the project are equal to each other at this discount rate. In other words, it is the discount rate where the NPV of the project is zero (Accounting4managment, n.d). There is no specific direct formula for manual calculation of IRR. Instead, the calculation is based on the equation where NPV id zero using various cash flows at different discount rates. However, it can be easily calculated on Excel and financial calculators. 1. Where “IRR” of the project is greater or equal to “project’s cost of capital”, the organization accepts the project as it indicates that the return is higher than what organization pay to borrow money for the project. 2. Where “IRR” of the project is lower than the “project’s cost of capital”, the organization rejects the project indicating that it would obviously not prefer to receive a return lower than what they pay to borrow