Capital Buget Reccomendation

Capital Buget Reccomendation

Capital Budget Recommendation
ACC 543: Managerial Accounting & Legal Aspects of Business
Rick Collins
August 2, 2010

Capital Budget Recommendation
Guillermo Furniture is a company that makes budget and designer sofas. Guillermo is based in Mexico in Sonora, and has a large customer base in the United States as well. As a new hire in the Accounting department I have been asked to differentiate among the various capital budget evaluation techniques, explain how these different techniques will help make the appropriate recommendation, and recommend a course of action based on a capital budget evaluation technique.
Capital Budget Evaluation Techniques
Most companies employ capital budgeting to authorize capital spending on long term projects and on other projects that requiring large investments of capital. Capital projects are typically evaluated using both quantitative analysis and qualitative information. Capital budgeting analysis instead of using net income calculated by using the accrual basis uses cash inflows and cash outflows. There are two capital budget evaluation processes that take into consideration the time value of money Net Present Value or NPV and the Internal Rate of Return or IRR (Edmonds,2007).
Time value of money is essential when reviewing possible business investments that have different costs, cash flows and service lives. Using a discounted cash flow technique such as the net present value method allows a business to consider the possible cash inflows, cash outflows and the necessary rate of return on the investment before it is considered viable.   When the required rate of return is calculated it becomes the discount rate that is used when calculating the net present value of the investment (Edmonds,2007).

When a company chooses to use the internal rate of return method they are assuming the higher the internal rate of return the more profitable the investment will be in the end (Edmonds pg 1160). The internal rate of return...