Comparative Analysis of the Traditional Models for Capital Budgeting

M J Alhabeeb

doi:10.5539/ijms.v8n6p16

Abstract

<p>Financial decision making for investing firms requires metric tools for comparison and analysis. The managerial choice among many investment alternatives with complex possibilities has made it easier to rely on the now more advanced computer programs of simulation that considers the uncertainty and stochastic changes in the cash flow and risk levels. The major drawback here, especially in the academic world, is the increasing dependency on software and departing from the underlying mathematical reasoning that is most practically fathomed by the manual problem solving. This paper goes back to the tradition on analyzing and comparing the major models of capital budgeting.</p>

Highlights

Capital budgeting focuses on long-term and strategic plans to sustain a stable and more productive future for the firm
While we compared the Net Present Value to the Internal Rate of Return, we can conclude that adding the profitability index would make the picture clearer
Declaring and recognizing the limit on investment may mean recognizing some sort of capital scarcity, which should most likely lead to seeking allocation efficiency, and that is what is called capital rationing

Summary

Introduction

Capital budgeting focuses on long-term and strategic plans to sustain a stable and more productive future for the firm. Given that alternative investment opportunities differ in many aspects such as the level of risk associated with each one and their capacities to yield future returns, the criteria for choice would be for the upper management to employ objective, quantitative, and credible methods to evaluate the proposed alternatives and select the best, especially in terms of higher profitability and less risk. Many methods and techniques have been developed, tested, and modified for the best ways to evaluate the worth of investment projects. The method would be to differentiate among the actual and most traditional ways of capital budgeting followed in the business world by exposing their mathematical analyses as they are tied to real life scenarios

Objectives

Methods

Findings

Discussion

Conclusion