Captial Budgeting

Capital Investing

Adam Copen

Acc/543

August 9, 2012

Kyra Squirrel

When it comes to capital investing many techniques can be used. Picking the right technique for a company can be a long draw out process. “Once a company purchases a capital asset, it is committed to that investment for an extended period of time” (Edwards, 2007). Guillermo Furniture wants to discover the technique will provide the greatest returns. There are two major capital investing techniques. One is net present value (NPV), and one is internal rate of return (IRR). “Managers can choose from among numerous analytical techniques to help them make capital investment decisions. Each technique has advantages and disadvantages” (Edwards, 2007). Guillermo Furniture wants to know the difference between net present value and internal rate of return, and which technique will give them the best return. Guillermo Furniture wants a recommendation on what technique to use. Finally Guillermo Furniture wants calculations on the recommendation made.

Net Present Value

“NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative” (Investopedia, 2012). By using net present value, Guillermo can see how much to invest today and how much cash flow they would have for a set number of years. Net present value is made for outside investors, and for managers.

Internal Rate of Return

“The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project” (Investopedia, 2012). The internal rate of returns deals with...