Strategic Corporate Finance - Essay Example

There are several capital budgeting techniques that can be used by companies; NPV can be defined as the difference that exists between the present value of cash outflows and the present value of cash inflows. The technique is applicable in capital budgeting in the analsyiss of the profitability that is associated with an investment. The analsysis is usually sensistive to ythe future cashflows that are reliable that a project is likely to yield. The technique usually compares the value of a dollar at the current moment in regard to the same dollar in the future.

The values must be inclusive of the effects of inflation and the rate of returns that are expectrsed from a project.a project that has a negative NPV should be rejected because the expected project would probably yield to a loss. In the available projects in the case of Yorkshire, both inshore and off shore prohjects should be rejected because they both have a negative NPV ammounty. That will mean that if the company goes ahead with the project, the company will end up getting losses. IRR can be defined as the discounting rate that is used in capital budgeting in an attempt to make the net present value of cashflows from a project equalto zero.

The higher the IRR of a project, the more desirable a project is. IRR is therefore useful in the ranking of projecst that may be considered by a company. If all factors are constant, the project that yields the highest IRR should be considered and undertaken. Irr is also termed as economic rate of return. (ERR). Irr can be thought to be the rate of growth that a project is expected to generate. The IRR of a project can be compared agaibnsts the rates that are [prevailing in the securities matrkrt.

If a company can not find a project that hjas an IRR that is greater than the retunrs, the company should prefer investing the retained earnings into the market. The working capital of a company is equivalent to the current assets less the current