Capital Budgeting Research Assignment Paper (Coursework Sample)

Capital Budgeting
Name:
Date:
Institution Affiliation:
Capital Budgeting
Capital budgeting is important since it leads to an easy accounting process and measure of the business profitability. Capital budgeting has errors which are very costly since they may lead to the business spending unnecessary money. The spent money is irreversible thus; later on it affects the profits. NPV, Net Present Value, in business is described as the business between the cash flows currently and the current cash outflow in a business. It is a process in capital budgeting for evaluating the profitability of a proposed project. The advantage of NPV is that it takes into account the diminishing value of money. The biggest setback of NPV is that guess works is done in evaluating the business’s cost of capital. PI, Profitability Index, is a method used to analyze the investment projects of their profitability.
It is also known as the benefit cost ratio. One of the major advantage of profitability index in capital budgeting is that it considers the time value of money. The diminishing value of money with time is considered in PI. The disadvantage of Profitability Index is that during computation, it is very difficult to evaluate the interest rates and discount rates. This is because interest rates and discount rates often fluctuate. On the other hand, IRR, internal Rate of Return, is defined as a computation metric in capital budgeting which is used in measuring the...