MGMT 122 Chapter Notes - Chapter 13: Capital Budgeting, Earnings Before Interest And Taxes, Net Present Value
Document Summary
Capital budgeting is used to describe how managers plan significant investments in projects that have long term implications such as the purchase of new equipment or the intro of new products. There are four methods for making capital budgeting decisions: payback method, net present value method, internal rate of return method, simple rate of return method (cid:1) (cid:1) Any decision that involves a cash outlay now in order to obtain a future return is a capital budgeting decision: cost reduction decisions, expansion decisions, equipment selection decisions, lease or buy decisions, equipment replacement decisions. Two broad categories: screening decisions: whether a proposed project is acceptable (passes a present hurdle, preference decisions: relate to selecting from among several acceptable alternatives. The first three methods focus on analyzing the cash flows associated with capital investment projects whereas the simple rate of return method focuses on incremental net operating income.
