scholarly journals A Review of Capital Budgeting Techniques

2020 ◽  
Vol 8 (2) ◽  
pp. 32
Author(s):  
Oluseun Paseda
Keyword(s):  
Corporate Strategy ◽  
Net Present Value ◽  
Capital Budgeting ◽  
Business Environment ◽  
Rate Of Return ◽  
Present Value ◽  
Investment Projects ◽  
Payback Time ◽  
Size Firm ◽  
Accounting Rate

Perhaps the single most important decision faced by management is the selection of investment projects that maximize the present value of shareholders’ wealth. This paper is a review of the literature on capital budgeting procedures. Analytic techniques such as Net present value (NPV), Internal rate of return (IRR), Payback, Discounted Payback, Time-adjusted discounting, Accounting Rate of Return, Profitability Index and Modified IRR are reviewed here. Additional supplementary techniques, when some complexities relating to risk and uncertainty are involved, are also discussed. Results of field surveys are reported. In sum, the results suggest increased prominence of the NPV as an evaluation technique consistent with its much emphasized academic merit. In particular, the Graham and Harvey (2001) survey reveals that the likelihood of using specific evaluation techniques is linked to three factors namely firm size, firm leverage and CEO characteristics. The study recommends the use of real options techniques as they facilitate the linkage of financial objectives with corporate strategy in the ever-increasingly complex business environment.

scholarly journals The Extent of Using Capital Budgeting Techniques in Evaluating Manager’s Investments Projects Decisions (A Case Study on Jordanian Industrial Companies)

2017 ◽  
Vol 9 (12) ◽  
pp. 175
Author(s):  
Osama Samih Shaban ◽  
Ziad Al-Zubi ◽  
Ahmad Adel Abdallah
Keyword(s):  
Net Present Value ◽  
Research Study ◽  
Capital Budgeting ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Investment Projects ◽  
Internal Rate ◽  
Industrial Companies ◽  
Accounting Rate

The aim of this research paper is to study the extent of using capital budgeting techniques on choosing the suitable project for investment. The current research study focused on capital budgeting techniques such as Net Present Value NPV, and Internal Rate of Return IRR, and Pay Back period PB, which is considered the main tools in the hands of decision makers in deciding the best possible alternative of investment. In order to achieve the purposes of the study a questionnaire have been created (based on Graham and Harvey survey in 2001), the aim was to cover most of the Jordanian industrial companies despite of their size and ownership in the current year 2017. Resolution data were analyzed using the statistical program SSPS. Finally, the study concluded that, 58% of Jordanian industrial companies use the Net Present Value, 22% use the Payback Period, 12% use the Internal Rate of Return, and the remaining used a combination of the Accounting Rate of Return, Profitability Index, and sensitivity analysis. The current research study is expected to assess management in choosing the best capital budgeting technique in the evaluation of its future investment projects.

scholarly journals Evaluation of Investment Projects: A Case from Turkish Cement Sector

2016 ◽  
Author(s):  
Miyase Karabulut ◽  
Sıtkı Sönmezer ◽  
Vedat Zeki Yenen ◽  
Zeynep Emir
Keyword(s):  
Qualitative Research ◽  
Net Present Value ◽  
Capital Budgeting ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Investment Projects ◽  
Preliminary Results ◽  
Internal Rate ◽  
Exclusive Or

Capital budgeting is crucial for firms that have projects to evaluate especially when the projects are mutually exclusive or financing is scarce. The aim of the study is to determining the most widely used methodologies in capital budgeting decisions and their effectiveness. A qualitative research will provide cement sector specific examples in assessing industry projects and compares the methods of Net Present Value, İnternal rate of Return, Pay-back period, discounted pay-back period and MIRR. Each method is briefly discussed and its drawbacks and advantages are mentioned in detail. Other sectors are also examined in terms of capital budgeting. Our preliminary results indicate that net present value method dominates capital budgeting decisions in the sectors under study.

scholarly journals Reinvestment Bias When Analyzing Mutually Exclusive Assets

2011 ◽  
Vol 2 (3) ◽  
pp. 71
Author(s):  
Robert J. Sweeney
Keyword(s):  
Net Present Value ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Internal Rate ◽  
Current Period ◽  
The Cost ◽  
Flows Over Time

Capital budgeting decisions generally involve the commitment of resources in the current period to secure positive cash flows over time that generate a rate of return in excess of the cost of the funds invested. The most common techniques used to perform this analysis are the Net Present Value (NPV) and the Internal Rate of Return (IRR).Conceptually, these two techniques are substitutable; i.e. the resulting decision from a NPV analysis is identical to the decision from an IRR analysis. In practice, however, the NPV and the IRR can, on occasion, produce conflicting decisions. Specifically, when analyzing mutually exclusive assets the Net Present Value can support one asset while the Internal Rate of Return supports the other. The purpose of this paper is twofold; first, to highlight structural deficiencies in the conventional application of the NPV and the IRR, and second, to demonstrate a procedure to correct for these structural errors.

scholarly journals Three Corporate Finance Practices in Pakistan: A Review of Previous Studies and Way Forward

2021 ◽  
Vol 3 (1) ◽  
pp. 61-84
Author(s):  
Umar Farooq ◽  
Bilal Haider Subhani
Keyword(s):  
Capital Structure ◽  
Corporate Finance ◽  
Net Present Value ◽  
Capital Budgeting ◽  
Payout Policy ◽  
Debt Financing ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Dividend Payout

This study reviews the empirical studies arranged on Pakistani capital market and specifies the pattern of three corporate finance practices.  The subject of corporate finance discusses the various activities performed at firm level such as capital budgeting, capital structure, and dividend payout policy. The capital budgeting technique consists of six methods i.e., net present value, discounted cash flow, payback period, and internal rate of return etc. but Pakistani firms often interested in net present value and internal rate of return for capital investment evaluation. Similarly, the capital structure decision carries the debate on two options of financing i.e., debt financing and equity financing but literature shows that the Pakistani firms generally follow the pecking order theory and prefer more debt financing. Similarly, as for concern dividend payout policy, literature discusses the different theories and determinants but still unable to generalize the dividend payout trend specifically in Pakistani context. Corporate managers and policymakers can use the conclusion for strategic purposes.

scholarly journals Computing Capital Budgeting for Banking Sector

2021 ◽  
Vol 58 (2) ◽  
pp. 6502-6508
Author(s):  
Sushain Koul, Dr. Parag Ravikant Kaveri
Keyword(s):  
Financial Management ◽  
Banking Sector ◽  
Net Present Value ◽  
Average Rate ◽  
Capital Budgeting ◽  
Rate Of Return ◽  
Present Value ◽  
Banking Organization ◽  
Long Run ◽  
Selection Of

Perhaps the most difficult hurdle which companies come across is the selection of the project which is beneficial to the organization in the long-run and also increases the present value of the shareholders. This is where Capital Budgeting comes into play. Capital Budgeting is one of the most important areas of financial management. This paper gives an overview of what capital budgeting is, what different types of techniques comes under capital budgeting and how to represent capital budgeting technique algorithmically. In this paper we also throw some light on what the results of various capital budgeting techniques will be if any banking organization follows these techniques and compare those results. These techniques namely as Payback Period (PP), Average Rate of Return (ARR), Net Present Value (NPV), Profitability Index (PI) and Internal Rate of Return (IRR) are used to evaluate projects.

scholarly journals Risk Manage Capital Investment Decisions: A Lease vs. Purchase Illustration

2011 ◽  
Vol 25 (3) ◽  
Author(s):  
Thomas L. Zeller ◽  
Brian B. Stanko
Keyword(s):  
Capital Investment ◽  
Net Present Value ◽  
Investment Decisions ◽  
Capital Budgeting ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Wealth Creation ◽  
Font Size ◽  
Present Value ◽  
Internal Rate

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">This paper demonstrates how to build risk into capital investment decisions.<span style="mso-spacerun: yes;">&nbsp; </span>We illustrate how to combine distribution theory, technology, and a business professional&rsquo;s skills and insight into a capital investment analysis.<span style="mso-spacerun: yes;">&nbsp; </span>In addition, we show how management can approximate the risk of each cash flow estimate and display the overall capital investment results.<span style="mso-spacerun: yes;">&nbsp; </span>This framework is extended by showing how a mutually exclusive decision can be improved, using a lease versus purchase example.</span><a style="mso-footnote-id: ftn1;" name="_ftnref1" href="http://journals.cluteonline.com/index.php/JABR/author/saveSubmit/#_ftn1"><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><span class="MsoFootnoteReference"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; font-size: 10pt; mso-fareast-font-family: 'Times New Roman'; mso-fareast-language: EN-US; mso-ansi-language: EN-US; mso-bidi-language: AR-SA;">[1]</span></span></span></span></a><span style="font-family: Times New Roman;"><span style="mso-spacerun: yes;">&nbsp; </span>An Excel template is readily available from the authors allowing a hands-on application of the framework presented in this paper.<span style="mso-spacerun: yes;">&nbsp; </span>In addition, this paper positions the reader to comfortably use more advanced analytics, such as Monte Carlo simulation, a tool that is readily available in commercial software applications.</span></span></p><div style="mso-element: footnote-list;"><br /><span style="font-family: Times New Roman;"><hr size="1" /></span><div id="ftn1" style="mso-element: footnote;"><p class="MsoFootnoteText" style="text-align: justify; margin: 0in 0in 0pt;"><span style="font-size: 9pt;"><span style="font-family: Times New Roman;">This paper focuses on the application of net present value.<span style="mso-spacerun: yes;">&nbsp; </span>The advantage of using net present value in a capital budgeting decision is that it shows the potential stakeholder wealth creation and wealth destruction.<span style="mso-spacerun: yes;">&nbsp; </span>An internal rate of return analysis is intentionally left out of this paper.<span style="mso-spacerun: yes;">&nbsp; </span>According to Brealey, Myers and Allen, <em style="mso-bidi-font-style: normal;">Principles of Corporate Finance</em>, New York, NY: McGraw-Hill/Irwin 2006, pp. 91-99, internal rate of return should not be used to evaluate mutually exclusive capital investments.<span style="mso-spacerun: yes;">&nbsp; </span></span></span></p></div></div>

scholarly journals The Extent of Using and Trusting Capital Budgeting Methods in Projects Appraisal in Palestinian Corporations

2018 ◽  
Vol 12 (6) ◽  
pp. 151
Author(s):  
Ahmad N. H. Anabtawi
Keyword(s):  
Net Present Value ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Payback Period ◽  
The Other ◽  
Present Value ◽  
Internal Rate ◽  
Public Corporations ◽  
Rate Of Returns ◽  
Accounting Rate

This research paper aims to find the degree of the use as well as the trust of the Net Present Value (NPV), Payback Period (PBP), Internal Rate of Returns (IRR) and Accounting Rate of Returns (ARR) as a key capital budgeting method. The research conducted on the listed corporations in Palestine which are 48 company. A questionnaire distributed on 77 financial and project/operations managers in these corporations with 67 responds. The result shows that both discounted and non-discounted cash flows methods are used and trusted by Palestine public corporations. However, on the other hand, the above four methods are volatile in term of use and trust. The most used and trusted capital budgeting method is the Payback period (PBP). This followed by the Net Present Value (NPV). Accounting Rate of Retunes (ARR) becomes third. Thus the least used and trusted method is the Internal Rate of Returns (IRR). 

scholarly journals Analisis Kelayakan Pengembangan Usaha Pasta Kangen Jupiter dan Mogot Jakarta Barat dengan Menggunakan Metode Capital Budgeting Tahun 2019-2023

2021 ◽  
Vol 1 (1) ◽  
pp. 9-14
Author(s):  
Ni Puthu Eka Wardani Haliasih ◽  
◽  
Pambuko Naryoto ◽  
Keyword(s):  
Research Methodology ◽  
Net Present Value ◽  
Average Rate ◽  
Capital Budgeting ◽  
Payback Period ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Internal Rate

Abstract Purpose: This study aimed to determine the feasibility of establishing the Pasta Kangen Jupiter dan Mogot Jakarta Barat in West Jakarta. Research methodology: The assessment is reviewed with Capital Budgeting in Optimistic, Moderate, and Pessimistic versions. Several methods include Payback Period, Net Present Value, Profitability Index, Average Rate of Return, Internal Rate of Return, dan Discounted Payback Period. Results: Based on the results of calculations using the Optimistic and Moderate Version of Capital Budgeting method, Pasta Kangen Jupiter Daan Mogot Jakarta Barat business in West Jakarta is feasible to run, while the Pessimistic Version is not feasible to run.

scholarly journals Analysis capital budgeting investment projects substation 150 kV for tires company

2020 ◽  
Vol 12 (2) ◽  
pp. 189
Author(s):  
Andi Setyawan ◽  
Hasbullah Hasbullah
Keyword(s):  
Interest Rate ◽  
Net Present Value ◽  
Electricity Consumption ◽  
Electrical Energy ◽  
Capital Budgeting ◽  
Payback Period ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Investment Projects ◽  
The Interest Rate

The electricity consumption continues to increase, including in Indonesia, where the average electricity consumption rises 6.86% per year. In line with the ever-increasing production needs of companies needing more electrical energy during these electrical disturbances often occur due to power shortage. Therefore, the company proposes the investment of the construction of substations 150kv Expected to improve the reliability of electrical energy supply. This research conducted to analyze the value of investment carried by tire companies using historical data and company forecasts using the technical method of economics to analyze its finances. Based on the calculation result with the Payback period (PP) and Discounted Payback Period generates 5.35 years and 6.24 years.  Meanwhile, in the calculation of net present value (NPV) obtained favorable results in the 6th year of Rp 40,944,770,640.32, using an interest rate of 5%. In the calculation of the internal rate of return (IRR), the result of 5.5% concluded that the project return is higher than the minimum attractive rate of return (MARR) of the company by 5.17% of the Bank Indonesia interest rate. Then based on the sensitivity analysis gained that the lower the interest rate on this project, then the faster the return on the investment, and vice versa. The overall analysis of the scenario stated that the investment is worthy of running because it brings profit directly to the company.

scholarly journals EVALUATION OF INVESTMENT PROJECTS IN CASE OF CONFLICT BETWEEN THE INTERNAL RATE OF RETURN AND THE NET PRESENT VALUE METHODS

Ekonomika ◽  
2010 ◽  
Vol 89 (4) ◽  
pp. 116-130 ◽  
Author(s):  
Jonas Mackevičius ◽  
Vladislav Tomaševič
Keyword(s):  
Net Present Value ◽  
Investment Project ◽  
Expected Profit ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Investment Projects ◽  
Internal Rate

Results obtained by employing the net present value (NPV) and the internal rate of return (IRR) methods allow to objectively determine the effectiveness and attractiveness of an investment project and to compare investment projects differing in scope, length or the amount of expected profit. While results obtained by the NPV and IRR methods normally correlate, contradictions are possible in individual cases. Such contradictions are called ‘conflict between the IRR and NPV methods’. The paper deals with the main characteristics of NPV and IRR, analysing the substance of the conflict and cases of its manifestation. A technique for the resolution of the NPV and IRR conflict is proposed.

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