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Essay / Research Paper Abstract
This 3 page paper looks at different aspects of capital budgeting and investment explaining the meanings of the payback period, the internal rate of return, sunk and opportunity costs and working capital. The bibliography cites 3 sources.
Page Count:
3 pages (~225 words per page)
File: TS14_TEcapbud1.rtf
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Unformatted sample text from the term paper:
closely related as decisions need to be budgeted for and budgets need to allow for investment. There are several different tools that can be used to assess and budget for
investment decisions. One of the tolls is the payback period. The reason any investment is made is to create a profit, but the first hurdle is the break even
point (Chadwick, 2001). The payback period is the length of time it will take a company to repay the investment, whatever the source of the invested capital (loan or equity).
If this is a loan there is the need to count the cost of the interest as well as material costs in that. For example, if we have an investment
that is 10,000, and after the ongoing costs such as labour and variable costs there is a profit each month of 1,000, the payback period will be 10,000/1,000, giving us
10 months. This is a useful measure as it allows the company to see how long it will take the, to regain their initial investment. This may be needed
if the funds are then to be used for an alternative investment or as a measure if there is a requirement for short term returns. This also helps with the
management of equity and capital, knowing what s going to be tied up where and for how long. This may give one measure, but it is not very useful
when comparing two different types of investment and if used in the decision making alone may ;lead to the choice of the least profitable investment if the payback period is
longer for the more profitable investment. The use of the internal rate of return is a tool that can be used to compare different projects (Watts, 2001). This is a
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