Capital Budgeting Measurement Criteria

In: Business and Management

Submitted By twhit102
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Tiffany White
March 19, 2015
Business 3062 Fundamentals of Finance
Unit 5 Assignment 1
Capital Budgeting Measurement Criteria

1. Describe the Net Present Value (NPV) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using NPV?
Net Present Value (NPV) method for determining a capital budgeting project’s desirability is by computing the difference between the present values of a project’s cash inflows and outflows. Since this calculation includes the necessary capital expenditures and other startup costs of the project as cash outflows, a positive value indicates that the project is desirable that it more than covers all of the necessary resource cost to do the project itself. The acceptance benchmark when using NPV would accepting both inflows and outflows which means anything greater than zero represents value above and beyond the investment.
2. What is the payback period statistic? What is the acceptance benchmark when using the payback period statistic?
The payback period statistic is something in which you break even calculation for the costs of financing a new project. We run the subtotal of the cumulative sum of the cash flows up to the point that this sum exactly offsets the initial investment. The acceptance benchmark when using the payback period statistic could vary in different situations. It’s normally based in on the relevant external constraint. Chapter 13 gives an excellent example of “assuming that we have been told that the maximum allow- able payback for this project is three years. With this decision rule, we want to accept projects that show a calculated statistic less than the benchmark of three years:
3. Describe the Internal Rate of Return (IRR) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using IRR?
The Internal Rate of Return…...

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