Capital Budgeting Investment Appraisal or Term Paper

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It would be difficult for the company to satisfy its shareholders with differing interests, but there is a solution-Net Present Value.

Using Net Present Value (NPV) as criteria to select projects assumes proficient capital markets. In other words, in order to work the company has to have access to whatever budget is needed to continue the positive Net Present Value projects. Sometimes there may also be capital ration and the concept of capital budgeting process becomes more and more complex.

Alternative Rules for Capital Budgeting

While NPV is the rule which maximizes value of shareholders, some companies use other strategies for their capital budgeting decisions.

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Common alternative strategies include:

Profitability Index

Internal Rate of Return (IPR)

Payback Period

Return on Book Value

Investment decisions made from the Profitability index and Internal Rate of Return methods agree with those of Net Present Value. Decisions made using the return on book value and payback period method usually are suboptimal from the point-of-view of increasing shareholders value......

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