Chapter 13: Case Study 2 – Creating a Model for Capital Budgeting

During its existence, an organization will be faced with critical investment decisions, such as branch expansion, purchase of new equipment, making or buying machinery decisions, the introduction of new products, and research and development projects. All of these require the allocation of crucial financial resources. The management of these investment decisions, including the allocation of scarce resources, is referred to as capital budgeting. There are four common concepts developed to assist management with these critical decisions, namely, Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), and Pay Back Period (PBP). The first three of these consider the time value of money and the fourth one doesn't. In this chapter, we will discuss and explain these concepts and then put them into practice with a comprehensive case study. The following are the major topics covered in this...