StudentShare solutions

# NPV and IRR Capital Budgeting Tools - Assignment Example

## Extract of sample NPV and IRR Capital Budgeting Tools

Budget in the context of capital budgeting is the plan that describes in detail inflows and outflows of revenue and expenses during the project life. The project life for this case is 10 years. Budget will show the company detail plan of cash inflows and outflows during the 10-year operation period of the aircraft. The two words together – capital budget indicates a list of planned long-term investment outlays for projects. In this case, planned investment is to purchase one of two aircrafts and make additional profits from its operation. Capital budgeting is the method used to determine which among long-term capital investment should be chosen. In this case, we are determining one project – purchase of an aircraft. However, we are using two different aircrafts. For simplicity, two different aircrafts are considered as two separate projects. Capital budgeting process helps strategic planning committee pick up the option, which gives higher rate of return considering time value factor of money. This is why it is important in strategic management. Without capital budgeting strategic management team will enter into a wrong selection. Question 2. Explain why the NPV and IRR capital budgeting tools are superior to the accounting rate of return and simple payback techniques for determining the attractiveness of capital investment opportunities.  Answer. ...
This method has two limitations. It does not consider cash inflows for the project beyond payback year, and time value of money. Example: Given below cash flows of two different projects for the same return rate, k = 10 %. Project Investment Cash flow Yr 1 Cash flow Yr 2 A \$10,000 \$0 \$14,500 B \$10,000 \$ 10,000 \$ 2,500 Payback method will select project B, since it pays of in one year. Net present value (NPV) The concept of NPV is included in the following formula, NPV = - Initial Investment + Sum of present value of all cash flows until the end of the project. The basis of this method is in evaluation of time value of future money. NPV measures the additional market value that is created or destroyed as a result of implementation of investment. Example Given below cash flows of two different projects for the same return rate, k = 10 % Project Investment Cash flow Yr 1 Cash flow Yr 2 A \$10,000 \$0 \$14,500 B \$10,000 \$ 10,000 \$ 2,500 NPV A = - 10,000 + 0 + 12,000 / (1+0.1) 2 = - 10,000 + 14,500 / 1.21 = - 10,000 + 11,983 = 1,983 NPV B = - 10,000 + 10,000 / (1+0.1) 1 + 2,500 / (1+0.1) 2 = - 10,000 + 9,090 + 2,066 = 1,156 According to NPV selection method both projects have NPV > 0, but project “A” has higher value. With Payback method project “B” was selected, with NPV method project “A” is selected. Two-year cash flow calculation in NPV method shows that project “A” would maximize the investment. This cannot be said about Payback method. Accounting rate of return This method ignores time value of money. ...Show more
Cite this document
• APA
• MLA
• CHICAGO
(“NPV and IRR Capital Budgeting Tools Assignment Example | Topics and Well Written Essays - 1500 words”, n.d.)
(NPV and IRR Capital Budgeting Tools Assignment Example | Topics and Well Written Essays - 1500 Words)
https://studentshare.net/finance-accounting/73697-lasa.
“NPV and IRR Capital Budgeting Tools Assignment Example | Topics and Well Written Essays - 1500 Words”, n.d. https://studentshare.net/finance-accounting/73697-lasa.

## Summary

In the paper “NPV and IRR Capital Budgeting Tools” the author explains why the NPV and IRR capital budgeting tools are superior to the accounting rate of return and simple payback techniques for determining the attractiveness of capital investment opportunities…
Save Your Time for More Important Things
Let us write or edit the assignment on your topic
"NPV and IRR Capital Budgeting Tools"
with a personal 20% discount.
Grab the best paper

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

Capital Budgeting
In addition, the company in question has to contend with unpredictable economic climate, which may threaten the success of new investment plans. Solutions to these questions are tenable through capital budgeting techniques. This paper analyzes McKenzie Corporation, which is considering economic conditions under which it would fund expansion plans using equity.
3 pages (750 words) Case Study
Capital Budgeting. Payback Period. NPV
These decisions have a direct impact in the future profitability of the firm. These decisions cam also change the risk profile of the firm. For example, the firm may decide to invest the funds in an unrelated industry. As a result of this the firm will be able to diversify its risk.
4 pages (1000 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
Long-term assets are generally tangible items such as plant or equipment or property or intangible items such as trademarks or patents, technology and others. The decisions of capital budgeting are vital for
7 pages (1750 words) Research Paper
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
Based on what you have learned about capital budgeting, would this be a profitable investment over the next five years? Since all the techniques relevant to capital budgeting are indicative of viability of
2 pages (500 words) Assignment
Analyze Capital Budgeting Methodologies (NPV, IRR, MIRR, etc..)
As the resources of the business are limited, it is necessary to ration or budget those resources so that beneficial returns is earned from them (Maps of World, 2012). There are various techniques of capital budgeting some based on the concept cash flow from the
5 pages (1250 words) Research Paper
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
NPV, PI, IRR, and Payback
NPV has been considered the most reliable method in accessing the profitability of a certain project. The IRR on the other hand is a method that is the most used between the fortune 500
2 pages (500 words) Essay
Click to create a comment
Let us find you another Assignment on topic NPV and IRR Capital Budgeting Tools for FREE!
+16312120006