Week 7 Discussion Capital Budgeting 2 - Two examples of...

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Non-discounted methods of capital budgeting assumes that all money is equal. The money earned today or in the future has the same value as the money previously invested. It does not take into account the time value of money. An example of a non-discounted method is the payback method. This is a calculated that evaluates how long it will take to earn back the money paid for an investment. The problem is that this approach does not evaluate which investments made by the company will be more profitable. The discounted method of capital budgeting on the other hand will take the time value of money into consideration in its findings.
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Unformatted text preview: Two examples of this type of method are the net present value method and the internal rate of return equation. In these calculations, future cash flows are “discounted” from the end result. The result is that every dollar invested now is worth more than future dollars and money in the far future is not worth as much as money in the near future. To get the best picture of what is going on in your capital budget, it is best to at least combine the use of discounted methodology if the organization is going to use a non-discounted approach. Source: http://blog.accountingcoach.com/payback-nondiscounted-capital-budgeting/...
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