Question

To support growth strategies and combat competition with rivals, businesses seek external capital to further develop products and services in hopes to create new sales opportunities. Since capital investment often involves a huge money investment, longer time engagement and risks of uncertainties, any decision shall not be taken lightly and shall be carefully evaluated before putting money to start a long-term project. The goal is to ultimately make the right accept/reject decision. Respond to the following in a minimum of 175 words:

1) Discuss criteria and techniques used to evaluate a capital project.

2) Which criteria and techniques do you consider the most useful?

3) As a financial manager, would you use the same criteria or evaluation techniques for any capital project? Why or why not?

Can you please tell me your source of information, so I can go back and review it?

Thank you so much for your time and effort!

Answer 1

1.Most common criteria and techniques used to evaluate a capital project are-

(a)Payback period-The payback period is a calculation of how long it takes to get your original investment back and it is also easy to calculate.It can be used through normal and discounted methods.

(b)Net Present Value-The net present value approach considers the time value of money for as long as the projects generate the future cash flows.It is calculated after discounting the future cash flows using a discounting rate and adjusting it with the initial cash outflows to find the net positive or negative cash outfow.If the net cash flow is positive, the project is to be accepted, If the net cash flow is neagtive, the project is to be rejected.

(C)Internal rate of return - this method is used to find a rate of return at which the cash ouflow are equal to cash inflow. It is an equivalence rate of return in which the cash breakeven is found.

2. I consider the Net present value method is to be the best among all as it considers the time value of money and it provides with an appropriate measure of whether that a project is yielding with the positive cash inflows or negative cash inflows . The decision making of whether to accept a project or reject a project is also not complex using this method as when the net cash inflows are positive, The project is to be accepted and when the net cash flows are negative, the project is to be rejected.

3.No, i would not use the same criteria of judgement for every project as different projects have different risk exposures and they are to be performed in different circumstances. A manager needs to be highly flexible while selection of a project as a bad decision can let go of a good investment and can make you invest into a bad project and as most of the capital budgeting projects have a larger time frame , The risk and capital is very high So the decision is to be made with utmost prudency.