Capital Budgeting Techniques

3997 words 16 pages

This report describes capital budgeting techniques such as NPV (The NPV of an investment is the difference between its market value and its cost, IRR (The IRR is the discount rate that makes the estimated NPV of an investment equal to zero. PAYBACK (The payback period is the length of time until the sum of an investment’s cash flows equals its cost), discounted payback period (The discounted payback period is the length of time until the sum of an investment’s discounted cash flows equals its cost).

There are some notable differences between capital budgeting processes in developing and developed countries. Canadian firms tend to formally evaluate all investment opportunities, while US managers do a thorough analysis of only he
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[CHAN’s 2004 study (As cited in the R.M. Burns, at all (1987)]

These capital budgeting techniques focus on the impact of the capital investment on the firm’s cash flows. In discounted cash flow analysis, the present value of cash inflows over the life of the capital investment is evaluated against the present value of its cash outflows. The firm’s cost of capital and required rate of return are accounted for by the discount rate used in discounted cash flow analysis. [CHAN’s 2004 study (As cited in the Charles Horngren, at all 2000]

Through different research studies [1] [2] [3] We have concluded that following are the different capital budgeting techniques used in developing and developed countries
1. Net Present Value 2. Internal Rate of Return 3. Payback Period 4. Discounted Payback Period

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.

Formula: NPV compares the value of a dollar today to the


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