Chapter 7
Capital Budgeting
Introduction to Capital Budgeting
Capital budgeting is the process that businesses use to evaluate and decide on investments in long-term assets.
These decisions involve assessing ...
Basics of Investment Decision-making
Investment decision-making in business involves evaluating opportunities to allocate funds to achieve maximum returns.
It also requires carefully ...
Importance of Capital Budgeting
Capital budgeting is essential for businesses to make wise investment decisions and evaluate project success.
Businesses aim to generate profits, and ...
Advantages and Limitations of Capital Budgeting
Capital budgeting is essential for companies because it helps them plan for the future and invest in projects that match their long-term goals.
For ...
Capital Budgeting Techniques
Capital budgeting techniques are methods businesses use to evaluate and decide on investment projects.
The main techniques include Net Present Value, ...
Payback
The payback period is the amount of time taken to recover the initial cost of any investment.
The payback period, expressed in years, is a quick and easy ...
Payback Period
The payback period is a financial metric used to assess the time it takes to recover the cost of a project or any investment.
It is calculated by dividing ...
Discounted Payback Period
The discounted payback period method is used to determine the time it takes for a project to reach financial breakeven, where the present value of the ...
Net Present Value
Net Present Value is a capital budgeting technique used to evaluate the profitability of an investment or project.
It calculates the difference between ...
Net Present Value Method
The Net Present Value method is a financial technique that evaluates the worth of an investment or project.
Net Present Value involves calculating the ...
Decision-making Through Net Present Value
The Net Present Value or NPV method is a financial analysis tool companies use in budgeting to decide how and where to allocate capital.
A positive NPV ...
Internal Rate of Return
The Internal Rate of Return is a financial analysis tool used to evaluate the profitability of potential investments. It uses the same concept as net ...
Calculating Internal Rate of Return
The internal rate of return, or IRR, is the expected compound annual rate of return on a project or investment.
Consider an example of an electronic ...
Decision-making Through Internal Rate of Return
Internal rate of return or IRR plays a crucial role in decision-making processes, offering a clear benchmark for measuring the profitability of any ...
Average Rate of Return
The average rate of return, also known as the accounting rate of return, is a financial metric employed in capital budgeting to assess the profitability ...
Calculating Average Rate of Return
The average rate of return, or ARR, is particularly applicable in business scenarios when evaluating investment projects or capital expenditures.
This ...
Decision-making Through Average Rate of Return
The average rate of return or ARR facilitates business decision-making by showing which investments give higher average returns.
ARR ensures that the ...
Profitability Index
The Profitability Index or PI is a financial metric used in capital budgeting to evaluate the attractiveness of investment projects.
It is calculated by ...
Calculating Profitability Index
The profitability index or PI is calculated by dividing the present value of future expected cash flows by the project's initial investment ...
Choosing Between Projects: Mutually Exclusive
In capital budgeting, choosing between mutually exclusive projects involves selecting one project from a set of projects.
This decision is important ...
Choosing Between Projects: Limited Resources
In capital budgeting, various methods can be employed when choosing between projects with limited resources, with net present value or NPV being one of ...
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