Capital Budget Recommendations Acc 543

Capital Budget Recommendation

ACC 543

Capital Budget Recommendation

Guillermo Furniture produces budget and designer sofas. Based out of Sonora, Mexico, Guillermo has an ever expanding customer base in North America. As a new member of the Accounting department, Guillermo Navallez, owner of Guillermo Furniture, tasked me with determining which decision would provide the greatest return. To determine this, I will attempt to distinguish amongst the various capital budget evaluation techniques to clarify how these techniques can help make the suitable decision recommendation and course of action using the various techniques.

Capital Budget Evaluation Techniques

A good number companies utilize capital budgeting to authorize capital spending on projects that require a large investments of capital. Capital projects normally evaluated using both quantitative analysis and qualitative information. There are two capital budget evaluation processes that take into consideration the time value of money Net Present Value (NPV) and the Internal Rate of Return (IRR) (Edmonds, et al, 2007).

When reviewing proposed investments, the evaluation of the time value of money is essential for long-term investments. Net present value method allows a business to reflect on the potential cash outflows, cash inflows, and the rate of return on the investment necessary for consideration. When the required rate of return is calculated, it becomes the discount rate that is used when calculating the net present value of the investment (Edmonds, et al, 2007).

The internal rate of return method is used to rank investment alternatives. When utilizing the internal rate of return method, companies assume the higher the internal rate of return, the more profitable the investment (Edmonds, et al, 2007, 1160). First estimate the rate of return, then calculate the net present value. If the calculation produces a negative net present value, try a lower estimated rate of return and recalculate....