Case Study Assignment Example | Topics and Well Written Essays - 2250 words

Case Study - Assignment Example Capital budgeting decisions fundamentally places strong emphasis on time value of money. In this regard, net present value method is very effective as it takes in consideration discounting of the inflow. The NPV of project Alpha was determined to be  £36,700 while that of project Beta was determined to be  £29,340. Both NPVs are positive but project Alpha has higher NPV, hence the firm should accept project Alpha. Accounting rate of return has been measured by establishing proportionate relationship between average accounting income and average investment for a specific period. The ARR of project Alpha was determined to be 29.39% while that of project Beta was determined to be 1.62%. The reason for low ARR in project Beta is significant investment in new purchases in the third year. Based on ARR, project alpha should be accepted. Additionally, payback period is least for project Alpha and based on the argument that a project with quicker returns should be accepted, project Alpha is better investment that Project Beta. Nonetheless, the overall assessment favours project Alpha over project Beta. Therefore, Project Alpha is a better investment (Froot and Stein, 1998). Capital budgeting decisions can be evaluated using discounted and non-discounted techniques: the discounted techniques comprise NPV and IRR method while non-discounted techniques include ARR and Payback period. NPV is referred to the difference between initial investment in a project and the discounted future net cash flows from the project. The NPV of a project ranges among positive, negative or breakeven (equivalent to zero). The first criterion for accepting a project is positive NPV as negative NPV indicates unfeasible project while zero indicates breakeven. The second criterion for accepting or rejecting a project is that an investment with highest NPV will be accepted. Discounting cash flows using a discounting factor, which