This report’s findings show that companies use the Net Present Value, Internal Rate of Return, Profitability Index, Discounted Payback Period, and Payback Period when conducting project evaluation. However, many users tend to prefer Payback Period, Internal Rate of Return, and Net Present Value to assess the viability of a proposed project. Nonetheless, Net Present Value was seen to be the most popular tool and as a result, theoretically correct. Net Present Value is widely used because it is accurate in considering the time value of money. Net Present Value also adjust for several risk factors. Payback Period is used because of the ease of calculation and comprehension. This research recommends the use of Net Present Value for project evaluation as literature vouches for it as the best tools.
Inhaltsverzeichnis (Table of Contents)
- Executive Summary
- Capital Budgeting and Techniques
- Payback Period
- Net Present Value
- Profitability Index
- Internal Rate of Return
- Discounted Payback Period
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This report aims to evaluate various capital budgeting tools employed by organizations, analyzing their theoretical soundness and practical application in maximizing shareholder value. The research considers the characteristics and influences of decision-makers in identifying the optimal capital budgeting tool.
- Evaluation of different capital budgeting techniques
- Theoretical correctness and practical application of these techniques
- Influence of decision-maker characteristics on tool selection
- Comparison of the merits and demerits of various techniques
- Determination of the most suitable tool for maximizing shareholder value
Zusammenfassung der Kapitel (Chapter Summaries)
- Executive Summary: This section provides an overview of the report's purpose, methodology, and key findings. It highlights the importance of capital budgeting in maximizing shareholder value and introduces the research focus on comparing various capital budgeting tools.
- Capital Budgeting and Techniques: This chapter delves into the concept of capital budgeting and its role in organizational planning and investment decisions. It discusses the importance of incorporating strategic considerations into capital budgeting and introduces various techniques used for evaluating investment projects, including the Payback Period, Internal Rate of Return, and Net Present Value.
- Payback Period: This section explores the Payback Period technique, which calculates the time required for an investment's cash inflows to recover the initial investment. It discusses the advantages of Payback Period, such as its ease of understanding and its ability to address capital rationing. However, it also highlights the disadvantages, such as its neglect of cash flows beyond the payback period and its failure to consider the time value of money.
- Net Present Value: This chapter examines the Net Present Value (NPV) technique, which calculates the difference between the present value of cash inflows and the present value of cash outflows. It highlights NPV's advantages, including its consideration of the time value of money, its ability to adjust for risk factors, and its use of all cash flows over the project's lifetime. However, it also acknowledges potential drawbacks, such as its sensitivity to discount rate changes and its tendency to underestimate project value.
- Profitability Index: This section introduces the Profitability Index (PI) technique, which measures the ratio of the present value of future cash flows to the initial investment. It discusses the advantages of PI, including its simplicity, its measure of profitability, and its ability to adjust for risk. However, it also acknowledges the limitations of PI, such as its difficulty in defining project profitability and its potential for generating undesired results when dealing with mutually exclusive investments.
- Internal Rate of Return: This chapter explores the Internal Rate of Return (IRR) technique, which calculates the discount rate that makes the present value of cash inflows equal to the present value of cash outflows. It highlights the advantages of IRR, such as its consideration of the time value of money and its ability to compare investments. However, it also discusses the disadvantages of IRR, such as its complexity and its tendency to make unfavorable projects appear beneficial.
- Discounted Payback Period: This section introduces the Discounted Payback Period technique, which calculates the time it takes for the present value of cash inflows to recover the initial investment. It emphasizes the advantages of Discounted Payback Period, such as its ease of understanding and its consideration of the time value of money. However, it also highlights the drawbacks, such as its failure to account for cash flows beyond the payback period and its assumption of realistic reinvestment of intermediate cash inflows.
Schlüsselwörter (Keywords)
The report focuses on capital budgeting, net present value, internal rate of return, payback period, profitability index, discounted payback period, shareholder value, decision-making, and investment evaluation. These keywords reflect the primary themes and concepts explored within the text, emphasizing the importance of selecting appropriate tools for maximizing financial outcomes.
- Quote paper
- M. Sc Environmental Science Marvin Namanda (Author), 2016, Capital Budgeting, Net Present Value and other Business Decision Making Tools, Munich, GRIN Verlag, https://www.grin.com/document/355210
