Capital Budgetting Research Paper Example | Topics and Well Written Essays - 1750 words

Capital Budgetting - Research Paper Example This topic has various fields such as capital budgeting which acts as an instrument in the monetary and fiscal policy. The two policies are necessary in improving net worth in the economy of a country in order to enhance development. This is mainly achieved through the reliance of debts rather than from other convectional sources such as tax. Capital budgeting is introduced in the economy so as to reduce deficit caused when expenditure exceeds revenue. In addition, capital budgeting is also primarily concerned with investment in the economy within long-term assets. These assets can either be tangible items such as equipment and property or intangible such as technology, trademarks and patents. However, the key challenge in capital budgeting is defining appropriate balances between current and capital expenditure. It is, therefore, important to enhance proper capital budgeting in order to reduce debts. This paper work analyzes a comprehensive research on capital budgeting in the econo my. This is in an effort to identify some aspects of corporate practices, which are consistent with capital budgeting policies and decisions. Capital budgeting decisions Capital budgeting decisions is highly applicable in the economy to maximize market values of firms to their shareholders. The decisions, therefore, have greater and long range impacts on the performance of firms. This is because the nature of the capital budgeting decision can either cause success or failure of a firm in the economy framework. According to financial theory by Keynes, capital budgeting decisions revolve around assets values. This is by ensuring value of assets in the entire economy is equivalent to the discounted values of the expected future cash flow (Graham & Harvey, 2002). Net present value (NPV) vs. Internal Rate of Return (IRR) These are two capital budgeting decision measures that are used to evaluate the nature of the product market before undertaking investment project. This means that firms contemplating investment in the capital market need to embrace net present value (NPV) rule in order to know when to undertake projects. According to this rule, a firm is only required to undertake capital investment project when NPV is either zero or positive. However, current survey shows that many firms across the world use internal rate of return (IRR) as a primary criterion of evaluating capital investment projects (Gervais, 2009). According to a survey that was conducted in 2000 among large companies in the world, 10 percent of them relied on NPV as a primary source of business evaluation while more that 50 percent relied on internal rate of return. Although the two methods have a similarity in evaluating the nature of the market, they exhibit critical difference in that IRR is expressed in ratio form while NPV measures the value added in dollar. However, Dayananda indicates that research shows that most of the companies and firms across the globe uses internal rate of return and net present value for their capital budgeting techniques. In addition, large firms record high rate of using NPV than small companies. This is because they require more accurate measure to prevent incurring higher losses because they engage in paramount investment (Dayananda, 2002). In addition, some surveys show that NPV is also like to be used by firms with high leverage than IRR contrary to firms with a reduced debt