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Capital investment can be a crucial step in growing your business and achieving your strategic goals and Capital Project is a long- term, capital intensive investment project with a purpose to build upon, add to or improve a capital asset, but Capital projects are defined by their large scale and large cost relative to other investments that involve less planning and resources and also capital project that uses the cost of the product is capitalized or depreciated, but the most common example of capital projects are infrastructure projects like railways, roads, and dams and these projects include assets such as subways, pipelines, refineries, power plants, land, and buildings and the most common is in corporations, but they allocate huge amounts of resources to build or keep up with the capital assets, like equipment or a new manufacturing project, in more cases, capital projects are usually planned and talked about at the length to decide the most efficient and resourceful plan of execution (Barone, 2020).
The various methods for evaluating possible capital projects are Payback deals with the calculation of the number of years the company would take to earn that amount spent on a certain project and tend to avoid the time value of money. Accounting Rate of Return deals with the profit that the company would expect from an investment made on a certain project and it does not consider the time value of money. Internal rate of Return deals with the time value of money and considers the cash flows over the project and it calculate the rate that discounts the future cash flows. Net Present Value deals with the calculations of the discount rate with a target rate and if the target rate exceeds the initial investment made on the project. The project is accepted (BDC, 2021).
Net Present Value or NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project. NPV is the result of calculations used to find today’s value of a future stream of payments and if the Net Present Value of a project or investment is positive. it means that the discounted present value of all future cash flows related to that project or investment will be positive and therefore attractive and to calculate Net Present Value, a person needs to estimate future cash flows for each period and determine the correct discount rate (Fernando, 2021).
The Net Present Value Profile: It is used to chart the net present value for a certain project. This allows the decision makers to identify the profit on a certain project, so as to make an effective cost-benefit planning. Use of NPV profile: If the company could not decide which project to go to with, or which project would give them more profit, then this NPV profile will provide the valuable information and it helps to assess the project risk.
BDC (2021). How to evaluate a Capital Investment https://www.bdc.caen/articles-tools
Fernando, Jason (2021). Net Present Value https://www.investopedia.com/terms/n/npv.asp
Barone, Adam (2020). Capital Project https://www.investopedia.com/terms/c/capital-project.asp
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