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I need some assistance analyzing "Capital Budgeting"! What's Capital Budgeting? How do companies use Capital Budgeting and why is Capital Budgeting so important?

Response has to be 1,000-words/more (or at least one and a half pages long) with a minimum of 3 references in APA format!


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This solution of 994 words defines capital budgeting and gives an in-depth look at how companies use capital budgeting and value its importance. References used are included.

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Capital budgeting is a method companies use to determine whether a new project or investment opportunity is worth pursuing by comparing its expected discounted cash flow with its internal rate of return. The discounted cash flow involves the value of the resources associated with the initial launch of the project, taking into consideration incremental reductions or discounts for each year of the project. The internal rate of return is the average rate that will be realized by each resource that is invested over a specific period of time. It is normally in the best interest of the company to pursue all projects or investment opportunity that will enhance shareholder value. Because the amount of capital available for new projects or investments is limited at any given time, management will use capital budgeting techniques, such as net present value, internal rate of return, discounted cash flow and payback period, to determine which of these opportunities will yield the highest return over a specific period of time (Sullivan & Sheffrin, 2003). In order for capital budgeting to be effective, it is important for management to have an understanding of the balance between the amount of resources that will be used, the rate at which these resources will be used and how fast the investment will start to show a return, reach the break-even point and start to earn a profit. There ...

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