Coca Cola Capital Budget

3 March 2017

Accounting rate of return Net present value Profitability index Internal rate of return Modified internal rate of return Equivalent annuity These methods use the incremental cash flows from each potential investment, or project. Techniques based on accounting earnings and accounting rules are sometimes used – though economists consider this to be improper – such as the accounting rate of return, and “return on investment. ” Simplified and hybrid methods are used as well, such as payback period and discounted payback period.

John Burr Williams: Theory. This valuation requires estimating the size and timing of all the incremental cash flows from the project. These future cash highest NPV(GE). The NPV is greatly affected by the discount rate, so selecting the proper rate – sometimes called the hurdle rate – is critical to making the right decision. The hurdle rate is the minimum acceptable return on an investment. It should reflect the riskiness of the investment, typically measured by the volatility of cash flows, and must take into account the financing mix.

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Managers may use models such as the CAPM or the APT to estimate a discount rate appropriate for each particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. A common practice in choosing a discount rate for a project is to apply a WACC that applies to the entire firm, but a higher discount rate may be more appropriate when a project’s risk is higher than the risk of the firm as a whole. This is what net present value called. [edit] Internal rate of return Main article: Internal rate of return

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