Capital Budgeing Case Study Essay

There are at least six capital budgeting tools a firm can practice session in analyzing a capital expenditure. They are net present honor (NPV), internal rate of return (IRR), profitability index (PI), payback blockage (PB), discounted payback period (DRP), and modified internal rate of return (MIRR). This shift study will focus mainly on NPV and IRR, in summation to the remaining four capital budgeting tools.Net Present Value (NPV)The NPV of an investiture proposal for a project is the same as the present pass judgment of its annual free cash feed ins less the investments initial outlay (Keown, Martin & Petty, p. 310, 2014). Before calculating the NPV you must first forecast the project revenue for the life of the project to obtain the net cash flow figures. This involves accountants and analysts crunching numbers based on many factors such as the economy, tack on and demand, competition, and how the company plans on carrying out the project (University of Phoenix, 2013). NPV looks at the present place of the benefits minus the present valuate of the costs. You also need a discount rate it is normally the cost of capital. The cost of capital is used because a firm wants the project to at a minimum make more than what capital is now costing the firm to run its business.The rule for NPV is if the value is greater than or equal to zero the project is accepted (Keown, Martin & Petty, p. 310, 2014). aft(prenominal) completing a five year projected income statement and a five year projected cash flow from the capital budgeting character study for corporation A and B, this information was used to calculate the NPV for each corporation. Corporation As NPV= $2,025 and Bs is NPV= $3,293. Both NPVs are equal or greater than zero so two projects are a go, but corporation B has a greater NPV, making it a better choice if based on NPV just (University of Phoenix, 2013). Internal Rate of Return (IRR)