Capital Budgeting Techniques
Capital budgeting is the process of evaluating and selecting long-term investments that are in line with a company’s strategic goals. As a finance manager for a major utility company, there are several capital budgeting techniques that we can use to evaluate potential projects. One technique that we frequently use is net present value (NPV). This approach involves estimating the expected cash flows of a project and discounting them back to present value using a discount rate that reflects the company’s cost of capital (Finance, 2019). This allows us to determine the value that the project is expected to create for the company in present-day terms. We find this approach to be particularly useful because it takes into account the time value of money and allows us to compare projects of different sizes and time horizons on a level playing field. Another capital budgeting technique that we use is the internal rate of return (IRR). This is the discount rate that results in a NPV of zero for a given project (Finance, 2019). Essentially, it represents the expected rate of return on an investment. We find this approach to be useful because it allows us to compare the profitability of different projects and helps us to determine which projects are likely to provide the highest returns. Cont…
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