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Essay / Research Paper Abstract
A 3 page paper discussing in general terms three types of capital budgeting. The paper discusses net present value (NPV), internal rate of return (IRR) and modified internal rate of return (MIRR), all variations of the discounted cash flow model (DCF). Bibliography lists 4 sources.
Page Count:
3 pages (~225 words per page)
File: CC6_KSacctCapBudTy.rtf
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Unformatted sample text from the term paper:
opportunities available to organizations, most of which will require time, labor and financial resources for some period of time. Time and labor can be expressed in terms of dollars;
capital budgeting helps the organization plan for financial requirements but it also assists in illustrating to decision-makers which projects should be pursued and which should be rejected on the basis
of lack of profitability. The discounted cash flow (DCF) model is the most widely used method of capital budgeting, generally as the version
of DCF known as the net present value (NPV) approach. The DCF "focuses on cash inflows and outflows while taking into account the time value of money" (Horngren, Sundem
and Stratton, 2002; p. 436). The purpose here is to discuss several types of DCF-based capital budgeting. Net Present Value The NPV
method of capital budgeting is a DCF model that "computes the present value of all expected future cash flows using a minimum desired rate of return" (Horngren, Sundem and Stratton,
2002; p. 437). As example, if the current rate of cash inflow of a project is 100, and next year is expected to be 100, this needs to be
discounted by a defined rate of return (for example 10%) so the cash flow is 190 in current terms rather than the actual 200 total. If the sum of
all such discounted cash inflows is then greater than the sum of all discounted outflow treated in the same way then the desired result will be achieved. The NPV
of the project under consideration will be positive and so the project can be considered worthy of pursuing or at least considering further.
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