Why are capital budgeting evaluation methods important? What are the typical cap

Question

Why are capital budgeting evaluation methods important? What are the typical capital budgeting techniques used by corporations? What would you use to evaluate a mutually exclusive project?

What is GAAP? Why is GAAP important? What is IFRS and where is it used? What are 3 differences between GAAP and IFRS?

What are examples of profitability ratios? Why are they important? Who might use them?

Discuss 2 evaluation techniques for capital budgeting, describe how to calculate them and the advantages and disadvantages of each method.

Would you be willing to pay $24,099 today in exchange for $100,000 in 30 years? What would be the key considerations in answering yes or no? Would your answer depend on who is making the promise to repay?

Explanation / Answer

Note;

All given questions are separate & independent. Thus as per rule I am answering first question.

Why are capital budgeting evaluation methods important?

Capital budgeting evaluation methods are very important because these methods help in evaluating available investment options. As we know that before taking decision about investment we will have to check various available options.

Thus all these available options must be evaluated using capital budgeting evaluation methods. So these methods are very helpful in evaluating these investment options so that investor can select correct option which will be very helpful to the firm.

What are the typical capital budgeting techniques used by corporations?

There are different capital budgeting techniques used by corporations. Following are the main techniques used;

1. Payback period method

2. Net present value method

3. Internal rate of return (IRR) method

4. Discounted Payback Period method

5. Accounting rate of return method

6. Profitability index method

What would you use to evaluate a mutually exclusive project?

For evaluating mutually exclusive project, first of all we will have to use a method of capital budgeting. So in case of evaluating mutually exclusive project normally we use NPV and IRR method.

Suppose we are using NPV method then we need to calculate net present value of both mutually exclusive project and this net present value is calculated using a discounted factor.

So when we have calculated net present value of each project then we will compare NPV of both project and will choose a project which have higher NPV.

Hence we can say that evaluation of mutually exclusive project required a proper evaluation process.

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