### How to Use capital Budgeting Tools to analyze project?

The
concept of capital budgeting is that it must be done by taking into account
all the cash inflows and outflows so as to calculate net ash flow. This net
cash flow is then analyzed using proper capital budgeting tools for applicable
periods. The details of tools that can be used in doing this type of analysis
are as follows:-

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__Net Present Value (NPV)__

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NPV: It is basically calculated as difference
between the present value of the total cash outflow made in the project and the
total cash inflow made. The general rule to accept any proposal is to have
positive NPV and vice versa as per our best capital budgeting assignment help experts. The formula to calculate NPV is given below:-

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Net present value = Cash Flow1/(1+r)^n+…..+Cash flow N/(1+r)^n-
C0

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Where C
ash flow (1..n) = cash flow at different time interval

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Co = initial investment

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r = Cost of Capital

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n= various time interval

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In this case NPV project in the following way:-

·
The cash flow for various costing method
is determined first using different options.

·
NPV is calculated using cost of capital
given

·
The best option is selected i.e. one
having highest positive NPV.

The
various advantages and disadvantages to use NPV are as follows:-

__Advantages__

·
It considers the time value of money in
its evaluation.

·
It gives equal importance to both cash
inflow and outflow

·
It gives higher importance to
profitability and risks

·
Easy to implement and calculate

·
Firm can maximize its return using this
option

__Disadvantages__

It is quite difficult to apply in various analyses where cash flow is not proper

·
The
NPV cannot be used for comparison for two different projects with different
life

·
It
is complex to implement when WACC is used as discounting factor

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__ IRR__

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IRR
stands for internal rate of return. It basically gives the rate at which
project will give the return to the shareholders or various stakeholders as per our corporate finance assignment help service experts. The
general principle to use these tools is as follows:-

·
Accept
the project if IRR is greater than discounting factor

·
Reject
the project if IRR is lesser than discounting factor

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In this project, two cash flows at different interval will be analyzed
using this tool so as to calculate which gives higher IRR.

__Pros
of IRR __

·
It considers the time value of money in
its evaluation.

·
It gives equal importance to both cash
inflow and outflow

·
It gives higher importance to
profitability and risks

·
No need for WACC calculation

·
Firm can maximize its return using this
option

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