Question

what are the four factors that CFO needs to consider when deciding on a capital budgeting project?

Answer 1

The four factors that CFO needs to consider when deciding on a capital budgeting project:

1. The first criterion for evaluation is the hurdle rate. It is the rate that which the future cash flows from the project when discounted must exhibit a positive cash flow. The capital investment must generate a profit that exceeds its hurdle rate.

2. The second criteria is the payback period to judge how much time will pass before the company recovers its investment. Although it is not a very accurate method of evaluation since it ignores the time value of money, it is useful in business environments where in the investment must be recovered before it becomes obsolete.

3. Net present value is the third criterion to evaluate the project. A positive net present value i.e. the excess of discounted cash flows over the initial investment must be accepted and a project with negative NPV is to be rejected.

4. The fourth factor is Internal rate of return. IRR must be used in conjuction with NPV and it usually favours those with largest rate of return.