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Capital Budgeting Techniques and Decision-Making: A Comprehensive Analysis of NPV, IRR, and Sensitivity Analysis

A financial assignment analyzing NPV, IRR, and sensitivity analysis in capital budgeting.

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Capital Budgeting Techniques and Decision-Making: A ComprehensiveAnalysis of NPV, IRR, and Sensitivity AnalysisIntroductionCapital budgeting is a process used by companies for evaluating and ranking potentialexpenditures or investments that aresignificant in amount. The large expenditures could includethe purchase of new equipment, rebuilding existing equipment, purchasing delivery vehicles,constructing additions to buildings, etc. The large amounts spent for these types of projects areknown ascapital expenditures.Capital budgeting usually involves the calculation of each project's future accounting profit byperiod, the cash flow by period, the present value of the cash flows after considering thetimevalue of money,number of years it takes for a project's cash flow to pay back the initial cashinvestment, an assessment of risk, and other factors.Capital budgeting is a tool for maximizing acompany's future profits since most companies are able to manage only a limited number of largeprojects at any one time.Intended AudienceThe capital budgeting process is carried out by the organization and firm who is willing toundertake the project for long term. Therefore, they are the intended audience for detailexplanation of capitalbudgeting.Capital Budgeting Techniques:Net Present Value (NPV)

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