Question

Consider the incremental analysis and capital budgeting methods that are included this week. Choose two of those methods and provide examples to the class of how you can or do use them in your career or personal life. Explain how they could or do contribute to the decision making process and the benefits they derive.

Answer 1

Some of the major methods of capital budgeting is Net present value.

Net present value is the method in which one can analyze the different proposals and their return. It is calculated as Present value of cash flows less initial investment. Example:I plan to open a business in future and I have two options, one is to open an restaurant in a suburb area and the other option is to open in the metro area. I can analyze the initial investment and the expected cash flows from both the perspectives. Using the NPV capital budgeting technique, I will be able to analyze which investment can give me better returns.

I can also use incremental analysis, in analyzing the make and buy option in my business, I can use incremental analysis by analyzing the relevant costs pertaining to make and buy and the which ever option will have higher cost can be foregone and I can sekect the option by choosing the option with lower costs.

Thus, both these methods can help in contributing to the decision making process and can help in higher returns and profitability