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Capital Budgeting

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Accounting
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Colorado Technical University
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Running head: CAPITAL BUDGETING 1
Capital budgeting
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CAPITAL BUDGETING 2
Capital budgeting
The advantageous and disadvantages to each investing
NPV provides an objective analysis of the investment by discounting the future cash
flows at a desired rate. According to (Kalyebara & Islam, 2013), NPV gives managers an
informed way of analyzing the cash flows by looking at them in their present values and allows
to take into account inflation and time concept. The IRR allows investors to view the return on
their initial investment for comparison with the cost of capital. It indicates the viability or
profitability of the project in a simplified manner and does not require the calculation of the cost
of capital. The Payback period is easily understood and allows for an adjustment of the
expectation for uncertainties that may arise.
The IRR cannot be used for the evaluation of mutually inclusive projects together and
may overstate the returns for the investments whose earnings are reinvested at rates lower than
the desired IRR. The NPV suffers from problem of using the accurate discounting rate for the
projects, it does not take into account the scope of the project and does not given information on
qualitative aspects of the projects under analysis. The PBP may be unreliable for projects with
uneven cash flows, such as those that make huge returns towards the end of the project
(Kalyebara & Islam, 2013). It also ignores the cash flows generated after the Payback period
which makes it a subjective analytical tool not fit for major projects
The methods that EEC should use

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Running head: CAPITAL BUDGETING 1 Capital budgeting Student name Course CAPITAL BUDGETING 2 Capital budgeting The advantageous and disadvantages to each investing NPV provides an objective analysis of the investment by discounting the future cash flows at a desired rate. According to (Kalyebara & Islam, 2013), NPV gives managers an informed way of analyzing the cash flows by looking at them in their present values and allows to take into account inflation and time concept. The IRR allows investors to view the return on their initial investment for comparison with the cost of capital. It indicates the viability or profitability of the project in a simplified manner and does not require the calculation of the cost of capital. The Payback period is easily understood and allows for an adjustment of the expectation for uncertainties that may arise. The IRR cannot be used for the evaluation of mutually inclusive projects together and may overstate the returns for the investments whose earnings are reinvested at rates lower than the desired IRR. The NPV suffers from problem of using the accurate discounting rate for the projects, it does not take into account the scope of the project and does not given information on qualitative aspects of the projects under analysis. The PBP may be unreliable for projects with uneven cash flows, such as those that make huge returns towards the end of the project (Kalyebara & Islam, 2013). It also ignores the cash flows generated after th ...
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