Methods of capital budgeting
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Capital Budget Assignment for Students

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Methods of capital budgeting

Methods ofCAPITAL BUDGETING


Capital budget assignment for students

There are many formal methods which are used for capital budgeting. The chief methods of capital budgeting are the following. Students needing capital budgeting assignment helpmust memorize them:

  • Accounting rate of return

  • Payback period

  • Profitability index

  • Net Present value

  • Internal rate of return

  • Modified Internal rate of return

  • Real options valuations

  • Equivalent annuity method


Accounting rate of return

Accounting rate of return

  • Students needing capital budgeting assignment help have to reckon with accounting rate of return. Accounting rate of return is the rate of return from the net income of the proposed capital investment. It is given by the following formula:

  • Average return during period

  • Average investment

  • Here average investment refers to the average amount of capital spent for project and is given by the following formula

  • Book value at the beginning of year 1 + book value at the end of useful life

  •                                                       2

  • So suppose a company declares its accounting rate of return to be 7 percent then it means that the shareholders would get seven cents out of every one dollar of investment. This is a short description of accounting rate of return. For more on capital budgeting analysis methods, log on to MyAssignmenthelp.com.


Payback period

Payback period

  • Payback period is the second most important method to decide upon shareholder’s dividend. It is also important for students needing accounting assignment help online. It refers to the period of time that is necessary to recoup all the investments made on the project and reach a break-even point. It, however, should be noted here that the time value of the capital invested is not taken into account. Only the time to pay back the capital itself is taken into account. So if the proposed project has a total capital investment of $10,000 and returns are $5000 per year, then the payback period would be two years. There are several major limitations of payback period. For instance, it does not take into account the costs of risk taken, the time value of the money and the opportunity cost. However, because of its simplicity, it is widely used by business enterprises. If this capital budgeting method help is not clear to you and you want to know more on the other methods of capital budgeting then log on to our website.


Profitability index

Profitability index

  • Profitability index is the ratio of the payback to the investors divided by the investment made. It is important for students who need help with budgeting. It is given by the following formula:

  • P.I. = PV of cash flows

  •          Initial Investment

  • Here P.I. = Profitability index and

  • P.V. = Present Value

  • Profitability index is particularly helpful in quantifying the amount of value for each proposed investment and rank all the investments according to their values. For more on accounting assignment help, log on to MyAssignmenthelp.com.


Net present value

Net present value

  • Net Present Value (NPV) is the sum total of all the cash flow values, both incoming and outgoing for each project. It is an important part of capital budgeting assignment help material.

  • Each potential project's value is estimated using a discounted cash flow (DCF) valuation to find its net present value (NPV). This valuation requires estimating the size and timing of all the incremental cash flows from the project. These future cash flows are then discounted to determine their present value. These present values are then added up to get the NPV.

  • The NPV is greatly affected by the discount rate, so selecting the proper rate — sometimes called the hurdle rate — is critical to making the right decision. The hurdle rate is the minimum acceptable return on an investment. It should reflect the risk factor of the investment typically measured by the volatility of cash flows and must take into account the financing mix. Managers may use models such as the CAPM or the APT to estimate a discount rate assignment help appropriate for each particular project and use the weighted average cost of capital (WACC) assignment help 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's risk is higher than the risk of the firm as a whole. For more on NPV for capital budgeting analysis help, log on to MyAssignmenthelp.com.


Internal rate of return

Internal Rate of Return

  • A rate of return in finance especially corporate finance is the rate of profit on a project. Internal rate of return (IRR) is the discount rate often used in capital budgeting decision that makes the present value of all cash flows from a particular project equal to zero or in other words IRR is that rate where the investments behind a project reaches a breakeven point. IRR is often used to rank projects of investments and the project with the highest IRR is often used first. For capital budgeting decision help, Myassignmenthelp gives you great capital budgeting assignment help.


Modified internal rate of return

Modified Internal Rate of Return

  • As the name suggests, Modified Internal Rate of Return is a modified version of IRR. One short coming of IRR is that it is often used to calculate the actual annual profitability of a project. However intermediate cash flows are never taken into account. As such the actual IRR is lower than what is calculated. Hence, MIRR is used in the place of IRR. In fact most the companies now prefer to use MIRR in the place both NPV and IRR. Whether you are researching on MIRR or NPV and IRR, Myassignmenthelp gives you great accounting assignment help.


Real options valuation

Real Options Valuation

  • Capital budgeting assignment help is also concerned about Real Options Value. Real options analysis or real options valuation is another important method of capital budgeting. Real options are the types of options available to the investors that open up with each possible capital investment. They may be options to expand or options to cease if certain risk factors arise. They are often called ‘real’ because these options relate to tangible assets of the company including equipments and land rather than those relating to intangible assets. For the nest capital budgeting analysis methods log on to Myassignmenthelp.


Equivalent annual annuity

Equivalent Annual Annuity

  • Capital budgeting assignment help requires knowledge of Equivalent Annual Annuity. Equivalent Annual Annuity (EAA) is another poplar approach to calculate the annual cash flow generated by a project as if it was an annuity (an annuity is financial product that is designed to accept funds from an individual and upon annuitization, pay out a stream of payments to the consumer). Calculating the EAA is the following:

  • Calculate each project’s NPV.

  • Calculate that project’s EAA, so that each annuity is exactly equal to that project’s NPV.

  • Finally compare the EAAs of the tow project and chose one with the higher EAA.

  • These are some of the methods involved in capital budgeting. Capital budgeting has become increasingly important since huge sums of money are involved nowadays. Once the investment is made it cannot be reversed so it is better to weigh all the options before investing. Finally investment decisions are important for they decide the capital gains of the project. For more on capital budgeting assignment help, capital budgeting analysis help, capital budgeting decision help, accounting assignment help log on to Myassignmenthelp.


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