{"id":16063,"date":"2013-05-03T13:46:37","date_gmt":"2013-05-03T08:16:37","guid":{"rendered":"http:\/\/vskills.in\/certification\/tutorial\/?p=16063"},"modified":"2024-04-12T14:14:47","modified_gmt":"2024-04-12T08:44:47","slug":"value-and-capital-budgeting-2","status":"publish","type":"page","link":"https:\/\/www.vskills.in\/certification\/tutorial\/value-and-capital-budgeting-2\/","title":{"rendered":"Value and Capital Budgeting"},"content":{"rendered":"<h3><strong>Value and Capital Budgeting<\/strong><\/h3>\n<p>Capital Budgeting is the process by which the firm decides which long-term investments to make. Capital Budgeting projects,\u00a0<i>i.e.,<\/i>\u00a0potential long-term investments, are expected to generate cash flows over several years. The decision to accept or reject a Capital Budgeting project depends on an analysis of the cash flows generated by the project and its cost. The following three Capital Budgeting decision rules will be presented:<\/p>\n<h3>Major Methods<\/h3>\n<p>Many formal methods are used in capital budgeting, including the techniques as followed:<\/p>\n<ul>\n<li>Net present value<\/li>\n<li>Internal rate of return<\/li>\n<li>Payback period<\/li>\n<li>Profitability index<\/li>\n<li>Equivalent annuity<\/li>\n<li>Real options analysis<\/li>\n<\/ul>\n<p><b><i>Net Present Value<\/i><\/b><\/p>\n<p>Net present value (NPV) is used to estimate each potential project&#8217;s value by using a\u00a0discounted\u00a0cash flow\u00a0(DCF)\u00a0valuation. This valuation requires estimating the size and timing of all the incremental cash flows from the project. The NPV is greatly affected by the\u00a0discount\u00a0rate, so selecting the proper rate\u2013sometimes called the hurdle rate\u2013is critical to making the right decision.<\/p>\n<p>This should reflect the riskiness of the investment, typically measured by thevolatility\u00a0of cash flows, and must take into account the\u00a0financing\u00a0mix. Managers may use models, such as the CAPM or the APT, to estimate a discount rate appropriate for each particular project, and use the\u00a0weighted average\u00a0cost of capital(WACC) to reflect the financing mix selected. A common practice in choosing a discount rate for a project is to apply a WACC that applies to the entire firm, but a higher discount rate may be more appropriate when a project&#8217;s\u00a0risk\u00a0is higher than the risk of the firm as a whole.<\/p>\n<div class=\"apply\">\n<h3>Apply for Equity Research Certification Now!!<\/h3>\n<p><a href=\"http:\/\/www.vskills.in\/certification\/Certified-Equity-Research-Analyst\">http:\/\/www.vskills.in\/certification\/Certified-Equity-Research-Analyst<\/a><\/p>\n<h4><a href=\"https:\/\/www.vskills.in\/certification\/tutorial\/certified-equity-research-analyst\/\"><strong>Back to Tutorials<\/strong><\/a><\/h4>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Value and Capital Budgeting Capital Budgeting is the process by which the firm decides which long-term investments to make. Capital Budgeting projects,\u00a0i.e.,\u00a0potential long-term investments, are expected to generate cash flows over several years. The decision to accept or reject a Capital Budgeting project depends on an analysis of the cash flows generated by the project&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"footnotes":""},"categories":[3331],"tags":[4048,4053,4050,4049,4051,4052,4054,1738,4047],"class_list":["post-16063","page","type-page","status-publish","hentry","category-equity-research","tag-capital-budgeting","tag-equivalent-annuity","tag-internal-rate-of-return","tag-net-present-value","tag-payback-period","tag-profitability-index","tag-real-options-analysis","tag-value","tag-value-and-capital-budgeting"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v24.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Value and Capital Budgeting - Tutorial<\/title>\n<meta name=\"description\" content=\"Value and Capital Budgeting. 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