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CAPITAL BUDGET1Harry RobinsonCapital BudgetingFINC615-1503-03Dr. Anthony CrinitiColorado Technical University07/2015
CAPITAL BUDGET2Capital BudgetingNet Present Value (NPV) and Internal Rate of Return (IRR)Net Present Value is a capital budgeting technique; found by subtracting a project’s initial investment from the present value of cash inflows, discounted at a rate equal to the cost of capital. When investments are made, firms are spending money that has been obtained from investors. These investors expect a return on this money that they have put into the company, so a company should decide on an investment only if the present value of the cash flow generated by the investment is greater than the cost of the investment. This method discounts a company’s cash flows at the company’s cost of capital. The rate is the minimum that must be earned on a project to appease the investors. Projects that have lower returns are unsatisfactory to investors, and decrease a firm’s value; however projects with higher returns increase the firm’s value. If the