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Capital budget techniques NP

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Guillermo Furniture, a company that manufactures midgrade and high-end sofas, has just hired you as an accountant. The owner, Guillermo Navallez, has assigned you the tasks of determining which decisions provide the greatest returns.

Explain how capital budget techniques (NPV, IRR, Payback period) would help you make your recommendation to Guillermo. Explain the theory without using any dollar amounts.

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Your response is 430 words. It discusses each of the three measures and gives you an idea what each tells you. Then, it explains why all three might be needed.

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NPV is the discounted future cash flows expected from the venture using a hurdle or required rate of return. It is expressed in dollars. It gives the owner a feel for the dollar magnitude of the funds that would be generated ABOVE the minimum required level (hurdle rate/require return). NPV would help them know if the future cash flows yielded enough to be worthwhile and to cover the cost of capital and perceived risk of the project.

IRR is the total return of the project over the life of the project and presumes that all cash flows are reinvested at the project return rate. It is expressed as a percent. This gives you ...

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