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Capital Budgeting Decisions - Net Present Value

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Discuss the impact of the current level of interest rates on capital budgeting decisions, namely net present value. Consider the current bond yield curve. Does the direction of interest rates affect your prior assessment?

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The response provides you a structured explanation of net present value. It also gives you the relevant references.

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The capital budgeting process uses Net Present Value (NPV) which is the difference between present value of cash inflows and the present value of cash outflows. The net present value helps evaluate the profitability of an investment or a project. Normally if the net present value of a project is positive it should be accepted (3). The present value of future cash inflows is calculated and from that the present value of the future cash outflows is subtracted. Now to calculate the present value a discount rate is used.

The current level of interest rate has to be used as the discount rate. The current benchmark interest ...

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  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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