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Capital Budget Methodologies

  

Capital Budget Methodologies

There are a number of different methods (e.g., NPV, ARR, payback, or IRR) that can be used to evaluate whether an organization should approve a particular project. Each method has specific advantages and disadvantages based on the scenario in which the method is used. In order to become more effective decision makers, managers should have a strong understanding of these methods so they can determine which method would be most suitable for particular situations. In this Discussion, you will refer to your professional experience to consider an example in which capital budgeting methods played a role in decision making.

To prepare for this Discussion:

  • Consider an example from your professional career in which capital budget methodologies played a role. 

Post an analysis of capital budgeting methods to support decision making, including the following:

  • From your professional experience, describe an example of a monetary decision that would require the use of one or more of the capital budgeting methods (NPV, ARR, payback, or IRR).
  • From this example, identify which method you, as a manager, would choose to utilize in making the decision.
  • Illustrate why you would choose this particular method over the others.

Account for Management Decision Making

Week 8 Learning Resources

NVP, ARR, IRR, Payback

In these resources, you will study various accounting measurements that managers use to make decisions regarding the future of their company. Although most of the time the financial arm of the company will do the actual computations, it is important for managers to understand all of the measurements so they can apply them correctly to any situation.

· Franklin, M., Graybeal, P., & Cooper, D. (2019).  Why it mattersLinks to an external site. . In  Principles of accounting, volume 2: Managerial accounting . OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/11-why-it-matters

· Franklin, M., Graybeal, P., & Cooper, D. (2019).  11.1 describe capital investment decisions and how they are appliedLinks to an external site. . In  Principles of accounting, volume 2: Managerial accounting . OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/11-1-describe-capital-investment-decisions-and-how-they-are-applied

· Franklin, M., Graybeal, P., & Cooper, D. (2019).  11.2 evaluate the payback and accounting rate of return in capital investment decisionsLinks to an external site. . In  Principles of accounting, volume 2: Managerial accounting . OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/11-2-evaluate-the-payback-and-accounting-rate-of-return-in-capital-investment-decisions

· Franklin, M., Graybeal, P., & Cooper, D. (2019).  11.3 explain the time value of money and calculate present and future values of lump sums and annuitiesLinks to an external site. . In  Principles of accounting, volume 2: Managerial accounting . OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/11-3-explain-the-time-value-of-money-and-calculate-present-and-future-values-of-lump-sums-and-annuities

· Franklin, M., Graybeal, P., & Cooper, D. (2019).  11.4 use discounted cash flow models to make capital investment decisionsLinks to an external site. . In  Principles of accounting, volume 2: Managerial accounting . OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/11-4-use-discounted-cash-flow-models-to-make-capital-investment-decisions

· Franklin, M., Graybeal, P., & Cooper, D. (2019).  11.5 compare and contrast non-time value-based methods and time value-based methods in capital investment decisionsLinks to an external site. . In  Principles of accounting, volume 2: Managerial accounting . OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/11-5-compare-and-contrast-non-time-value-based-methods-and-time-value-based-methods-in-capital-investment-decisions

· Walden University, LLC.  (2024).  ARR/ROI    Download ARR/ROI [PDF]. Walden University Canvas. https://waldenu.instructure.com

· Walden University, LLC.  (2024).  How to calculate NPV and IRR    Download How to calculate NPV and IRR [PDF]. Walden University Canvas. https://waldenu.instructure.com

· Walden University, LLC.  (2024).  Net present value, accounting rate of return, internal rate of return, and payback to make investment decisions    Download Net present value, accounting rate of return, internal rate of return, and payback to make investment decisions [PDF]. Walden University Canvas. https://waldenu.instructure.com

· Walden University, LLC. (2021).  What are NPV and IRR? [Video]. Walden University Canvas. https://waldenu.instructure.com

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Module 3 Assignment: Organizational Performance Analysis and Recommendations

Prepared by: Replace this text with your name.

Date: Replace this text with the submission date.

Walden University

MBAX 6050: Accounting for Management Decisions

Executive Summary

Replace this text with your executive summary.

Part 1: The Financial Performance Analysis

Replace this text with introductory information. Add or remove headings as necessary.

[Heading]

Insert your calculations of the NPV, payback, IRR, and ARR from Excel. Add or remove headings as necessary. For information on inserting data from Excel into Word, refer to the following: Microsoft. (n.d.). Insert a chart from an Excel spreadsheet into Word. https://support.microsoft.com/en-us/office/insert-a-chart-from-an-excel-spreadsheet-into-word-0b4d40a5-3544-4dcd-b28f-ba82a9b9f1e1

[Sub-Heading]

Replace or remove this text. Add or remove headings as necessary.

Part 2: Ethical Responsibility

Replace this text with introductory information. Add or remove headings as necessary.

[Heading]

Replace or remove this text. Add or remove headings as necessary.

[Sub-Heading]

Replace or remove this text. Add or remove headings as necessary.

Part 3: The Triple Bottom Line and Positive Social Change

Replace this text with introductory information. Add or remove headings as necessary.

[Heading]

Replace or remove this text. Add or remove headings as necessary.

[Sub-Heading]

Replace or remove this text. Add or remove headings as necessary.

References

[Please delete this note before submitting your Assignment. For more information about formatting your reference list, please visit the following site: https://academicguides.waldenu.edu/writingcenter/apa/references .]

Include appropriately formatted references to support your Assignment. Refer to the Assignment guidelines for further information on the requirements.

Page 5 of 15

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Part 1 – Capital Budget

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Instructions: Your Instructor will provide the numerical data of the required investment, annual cash flows, annual net income, average book value, and cost of capital to students. Use that information to calculate the NPV, payback, IRR, and ARR by filling in the highlighted cells. Additionally, use the IRR Worksheet to calculate the IRR using the Excel =IRR formula.
Air Scrubbers
IRR Worksheet
Air Scrubbers Furnace Fuel Change Period Cash Flow
0
Net Present Value using the Annuity Table to determine PV of cash flow Net Present Value using the Annuity Table to determine PV of cash flow 1
NPV = Initial Cost + (Net Annual Cash Flow × Factor) Amount Factor Present Value NPV = Initial Cost + (Net Annual Cash Flow × Factor) Amount Factor Present Value 2
Initial investment 1 $ – 0 Initial investment 1 $ – 0 3
PV of Annual net cash flow for 15 years – 0 PV of Annual net cash flow for 15 years – 0 4
Net present value $ – 0 Net present value $ – 0 5
OR OR 6
Net Present Value Using Excel to determine PV cash flow Net Present Value Using Excel to determine PV cash flow 7
NPV = Initial Cost + PV of Cash Flow Present Value NPV = Initial Cost + PV of Cash Flow Present Value 8
Initial investment Initial investment 9
PV of Annual net cash flow for 15 years =PV(rate,value1,[value2]) PV of Annual net cash flow for 15 years =PV(rate,value1,[value2]) 10
Net present value $ – 0 Net present value $ – 0 11
12
Payback Period = Initial Investment / Net Annual Cash Flow Payback Period = Initial Investment / Net Annual Cash Flow 13
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Internal Rate of Return Internal Rate of Return
Using Annuity Table Using Annuity Table Furnance Fuel Change
OR OR IRR Worksheet
Using Excel =IRR(M6:M21) use the IRR worksheet Using Excel =IRR(M26:M41) use the IRR worksheet Period Cash Flow
0
Average Rate of Return = Ave Net Income / Ave Book Value of investment Average Rate of Return = Ave Net Income / Ave Book Value of investment 1
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