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Chapter 11 - Chapter 11 Capital Budgeting the process of...

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Chapter 11 Capital Budgeting the process of evaluating and planning for purchases of long-term assets. Entails budgeting our firm's capital in a way that will increase firm value. usually 30-40-50 year projects. Capital budgeting decisions are potentially th emost important decisions that managers make because they largely determine the shape and character of the firm. The Ideal Decision-Making Criteria for Capital Budgeting 1)Include all cash flows that occur during the life of the project 2)consider the time value of money for those future cash flows 3)An ideal evaluation method should be able to account for varying levels of risk between projects(IRR, payback period,NPV). Payback Period the number of years required to recover the initial cash outlay. Firms that use this method determine the acceptability of a project by comparing the payback calculation to some arbitrary standard set by management. many businesses and professionals use this method today to do quick analyses of potential projects or to build their intuition about a project's cash flows and constraints.
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