Three methods for developing probability estimates (not decision models) were discussedin "Capital Budgeting and Long-Term Financing Decisions, 4th Edition", what are they and which of these is most common in practice?

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Hubert KochLv2

29 Sep 2019

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For most of us, a capital budgeting decision would be buying a house, which is a purchase with a long-term investment. For organizations, long-term investments can be acquiring another company, building a larger factory, developing a new product line, etc. Think of a company youâve heard about recently that has revealed their next capital budgeting decision. What is that decision?

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What are some sources of short-term financing (current liabilities)? Why is long-term assets and capital budgeting important?

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How do we traditionally define capital budgeting infinance?

Capital budgeting is a technique used in Finance by companiesto evaluate and rank the investment projects. These are the largeexpenditure projects including the purchase of plant and equipment,investment in new business, construction of buildings etc.

What is the purpose of capital budgeting in the business firm,and how is it used?

Capital budgeting calculation involves cash flows withconversion into time value of money and arriving at a profit. Thereare several methods used for evaluating capital budgeting projects.Payback period method, Net present value method, internal rate ofreturn method and profitability index. All of these methods help amanager to analyze and select the projects based on profitabilityand returns. It is used to help the managers in arriving atinvestment decisions compared with the cost of capital. They alsogive the knowledge of time period within which cash outflows willbe returned. Large businesses rely on NPV and IRR to takeinvestment decisions. This technique provides a real return valuefor a business rather than just calculating the profits.Traditional accounting involves making decisions based on profitswithout considering the time value of money. Capital budgetingtechnique helps the manager to take decisions with present valuesof future returns.

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