RESPOND TO STUDENTS POSTS
Dominique post
This week we discuss different analytical techniques, in regards to operating a business. In many businesses, Capitol investments are mandatory. Business homes certainly are going to be anxious to know when they will recover such an initial cost of an investment. When evaluating potential capital investments by your small business in various projects, the Internal Rate of Return, or IRR, can be a valuable tool in assessing the projects most worth pursuing. IRR measures the rate of return of projected cash flows generated by your capital investment. The IRR for each project under consideration by your business can be compared and used in decision-making. Internal rate of return is measured by calculating the interest rate at which the present value of future cash flows equals the required capital investment. The advantage is that the timing of cash flows in all future years are considered and, therefore, each cash flow is given equal weight by using the time value of money.The IRR is an easy measure to calculate and provides a simple means by which to compare the worth of various projects under consideration. A disadvantage of using the IRR method is that it does not account for the project size when comparing projects. Planning to purchase a new asset is quite the process. The company needs an installation plan, operating staff, and of course a financial plan. Budgeting is a cash-based concept. A company could have over $10 million in sales, but if there is no cash available for the purchase, it could be difficult to make. There are three types of capital budgeting techniques to consider for your budgeting purposes. They are: payback method, net present value method, and internal rate of return method.
