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DESCRIPTION
Capital Budgeting : Evaluating Cash Flows
Lecture Outline
1. Steps in Capital Budgeting
2. Payback, discounted payback
3. Rationale for the NPV Method
4. Rationale for the IRR Method
5. Why use MIRR versus IRR?
6. Profitability Index
7. Unequal lives
8. Economic life
Ideally, businesses would pursue any and all projects and opportunities that enhance shareholder value and profit. However, because the amount of capital or money any business has available for new projects is limited, management uses capital budgeting techniques to determine which projects will yield the best return over an applicable period.
Capital budgeting is the process a business undertakes to evaluate potential major projects or investments. Construction of a new plant or a big investment in an outside venture are examples of projects that would require capital budgeting before they are approved or rejected.
As part of capital budgeting, a company might assess a prospective project's lifetime cash inflows and outflows to determine whether the potential returns that would be generated meet a sufficient target benchmark. The capital budgeting process is also known as investment appraisal.
Capital budgeting's main goal is to identify projects that produce cash flows that exceed the cost of the project for a firm.
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Source: Best Practices in Cash Flow Management PowerPoint Slides: Capital Budgeting - Evaluating Cash Flows PowerPoint (PPT) Presentation, UJ Consulting
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ABOUT THE AUTHOR
UJ Consulting
Untung Juanto ST. , MM. Founder of UJ Consulting. He is professionally experienced business and management consultant in several local and multinational companies.
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