Explain how capital budgeting decisions are derived Capital budgetin o

QUESTION

Explain how capital budgeting decisions are derived
Capital budgetin or investmentappraisal is the palnning process used to determine wheter afrims long term investments such as newmachinery, replacement machinery, new palnts andreasearch development prijects are worthpursuing. Popular methods of capitalbudgeting include for decision makings are:- 1) Net Present Value (NPV) 2) Internal rate of return (IRR) 3) Discounted cash flow (DCF) 4) Payback period 5) Modified Internal rate of return(MIRR) 6) Profitability Index (PI) 7) Accounting rate of return Formulae forabove:- Accounting rte ofreturn:- ARR = average net income/ average netinvesment

abilityIndex:- PI = Present value of future cash flows/ Present value of initial investment IRR:- Present value of all cash flows from aparticular priject equal to zero. NPV:- The difference between the presentvalue of cash inflows and the present value of cash outflows. MIRR:- The MIRR assumes that all cash flowsare reinvested at the firms cost of capital. Payback period:- Cash outflows/cash inflows

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