1. Planning ahead for long-term, expensive projects
Capital Budgeting
Planning ahead for long-term, expensive projects

2. Reasons for taking on a project
Quantitative
Qualitative
Financially more favorable than other projects
Improves profits and/or net cash inflow in the future
Increases cash revenues or accrual revenues
decreases cash expenses or accrual expenses
More sophisticated techniques take into account the time value of money concerning cash flows over the entire length of the project
To maintain/improve a high quality product or service
How does this project impact the following:
customers
community
employees
others
Current and future qualitative impacts often affect future quantitative impacts

3. Techniques that look at cash flows and use time value of money (TVM)
Net Present Value (NPV)
Internal Rate of Return (IRR)
Considers a hurdle rate, such as the cost of capital
Takes into account the timing of future cash flows (cash benefits from revenues and cash savings on expenses)
Considers the full length of the project
Considers any projected future cash inflow from salvage when asset is sold
If NPV is zero, it is an acceptable project
If NPV is positive, it returns more than the hurdle rate
If NPV is negative, it returns less than the hurdle rate
Determines the exact percentage return on a project
Takes into account time value of money
Uses estimates of projected cash inflows/outflows for the project
Considers the full length of the project
Considers any future flow for salvage when asset is sold
If NPV equals zero, then the hurdle rate equals IRR

4. Present value index – limited benefit but involves cash flows and present value
Present value of cash inflows divided by present value of cash outflows for a project
Determines which project has the higher return without giving the exact amount of percentage return
Limited benefit –may as well do IRR to get exact return!

5. Methods that do not use the time value of money
Cash Payback
Unadjusted rate of return
Easy to understand
Uses net cash inflows/outflows
How long does it take on an annual basis for cash in to equal the initial cash out?
Does not consider the cash flows from total length of the project
Does not consider the cash flow from the salvage value at the end of the project
Does not use TVM
Expressed as a percentage return (though not as useful as IRR)
Uses net income instead of cash flow
Does not consider the impact of the total length of the project
Does not consider the impact from the sale of the asset
Does not use TVM