Question

Understanding the importance of capital in a company is limited in its availability. I also appreciate that capital projects are individually evaluated to determine if the capital project is worth pursuing. Can you help determine the type of analysis most companies would use in these instances and, how these two types of analysis's quantitative and qualitative tools are considered

Answer 1

Two types of analysis which can be used in determination of acceptance or rejection of the capital project are net present value and internal rate of return.

net present value will be calculating the present value of cash flows which are associated with the project and it will undertake all the cash inflows and outflows and it will net it out at the present value in order to find out whether this project is adding any kind of value to the organisation or not.if the net present value is positive the project is going to be accepted, if the net present value is not positive, the project is going to be rejected.

when we will consider the acceptability of the project through internal rate of return, then we will compare the weighted average cost of capital with internal rate of return and if the internal rate of return is higher than hurdle rate we will accept the project, if not, we will reject the project.

This type of analysis are mostly quantitative in nature but there will be discounting of various risk related factors and they are becoming qualitative because they will be trying to analyse the overall risk related to project along with the forward economic conditions along with the the ability of the management to maximize upon the rate of return.