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Capital Planning and Project Planning

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What is meant by capital planning? Why is Internal Rate of Return (IRR) important to an organization? Why is Net Present Value (NPV) important to a project? How would you select from multiple projects presented to your organization?

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Solution Summary

This response explains the concepts of capital planning, internal rate or return, and net present value

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The investment decisions of a firm are generally known as the capital budgeting or capital planning decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. The sale of a division or business (divestment) is also as an investment decision.

Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions. Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment.

The IRR is the discount rate that makes the NPV of an investment zero. An ...

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