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Long Term Financing Analysis: Capital Investment & Analyses

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Explain the concepts of net present value and internal rate of return analysis. What do the results of net present value and internal rate of return analysis tell senior managers of an organization? Would sensitivity analysis be a useful tool for assessing this capital project's risk and return?

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Net present value and internal rate of return are the important tools to make capital budgeting decisions. Capital budgeting involves making decisions about the long term mix of the composition of assets of the business. As per Zen Wealth, "Capital budgeting is the process by which the firm decides which long-term investments to make." Capital budgeting projects, i.e., potential long-term investments, are expected to generate cash flows over several years. The decision to accept or reject a capital budgeting project depends on an analysis of the cash flows generated by the project and its ...