Capital Planning and Decision Making
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What is meant by capital planning?
How would you select from multiple projects presented to the insurance company whom you work for?
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Solution Summary
The solution defines capital planning and discusses the decision making process when multiple projects are presented as options. It discusses the different methods of capital budgeting including net present value, internal rate of return, discounted cash flow, and payback period.
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Capital planning is the process of determining whether or not projects such as building a new plant or investing in a long-term venture are worthwhile.
Popular methods of capital budgeting include net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF), and payback period. An approach used in capital budgeting where the present value of cash inflows is subtracted by the present value of cash outflows. NPV is used to analyze the profitability of an investment or project.
NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.
NPV compares the value of a dollar today versus the value of that same dollar in the future, after ...
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