Capital Budgeting

# Capital Budgeting - Phase 2 Discussion Board Before...

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Phase 2 Discussion Board Before beginning any project such as the company’s construction project one must understand how to evaluate the project using various techniques. There are many techniques that could be used when analyzing projects. My focus in today’s meeting with the financial analyst is NPV, IRR, and MIRR. Each of these methods is different and offers their own unique perspective. NPV Many companies use the net present value (NPV) calculation when valuating projects or major purchases. The NPV allows the company to take the time value of money into consideration. This is important because the school of thought is that a dollar that the company receives today is worth more than a dollar that will be received in the future. The reason that a dollar is worth more today than say five years from today is that the dollar received today could be invested to generate a return. A dollar being received in the future could not be invested today to generate any returns. The NPV also take the discount rate into consideration. The discount rate is the company’s current cost of capital or current interest rate of any financed funds (Analytics for Managerial Decision Making, n.d.). Calculating the NPV basically helps the company to find the present value in today’s dollars of any future cash flows of a particular project. This amount could then be compared with the amount of money that would initially need to be paid out to begin the project. A project or major purchase is thought of as being profitable if the net present is a positive number. A positive value indicates that the NPV is greater than the cost of the project. A negative value

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would indicate that the NPV is less than the cost of the project, therefore the project would not be considered to be profitable (Analytics for Managerial Decision Making, n.d.).
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Capital Budgeting - Phase 2 Discussion Board Before...

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