Capital Budgeting Techniques for Forestry: A Review

1979 ◽  
Vol 3 (4) ◽  
pp. 141-143 ◽  
Author(s):  
James C. Fortson ◽  
Richard C. Field
Keyword(s):  
Net Present Value ◽  
Financial Analysis ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Decision Criterion ◽  
Rate Of Return ◽  
Capital Expenditures ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Key Steps

Abstract The key steps in the financial analysis of proposed capital expenditures are presented as well as the conditions under which the net present value or internal rate of return is the appropriate decision criterion. Factors which affect the choice of the discounting interest rate for cash flows are also reviewed.

scholarly journals Reinvestment Bias When Analyzing Mutually Exclusive Assets

2011 ◽  
Vol 2 (3) ◽  
pp. 71
Author(s):  
Robert J. Sweeney
Keyword(s):  
Net Present Value ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Internal Rate ◽  
Current Period ◽  
The Cost ◽  
Flows Over Time

Capital budgeting decisions generally involve the commitment of resources in the current period to secure positive cash flows over time that generate a rate of return in excess of the cost of the funds invested. The most common techniques used to perform this analysis are the Net Present Value (NPV) and the Internal Rate of Return (IRR).Conceptually, these two techniques are substitutable; i.e. the resulting decision from a NPV analysis is identical to the decision from an IRR analysis. In practice, however, the NPV and the IRR can, on occasion, produce conflicting decisions. Specifically, when analyzing mutually exclusive assets the Net Present Value can support one asset while the Internal Rate of Return supports the other. The purpose of this paper is twofold; first, to highlight structural deficiencies in the conventional application of the NPV and the IRR, and second, to demonstrate a procedure to correct for these structural errors.

scholarly journals Mutually exclusive capital projects: A critique of Fisherian analysis

1994 ◽  
Vol 25 (1) ◽  
pp. 47-51
Author(s):  
S. Paulo
Keyword(s):  
Net Present Value ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Rates Of Return ◽  
Capital Projects ◽  
Internal Rate ◽  
Project Life

In capital budgeting a Fisherian analysis is undertaken to resolve conflicts in rankings which arise when mutually exclusive projects have been evaluated according to the net present value and internal rate of return criteria. Within the literature, the projects which have been subjected to a Fisherian analysis, all have the same required rates of return because the required rate of return is held constant irrespective of the differences in the characteristics of the mutually exclusive projects. The conflict in rankings of mutually exclusive projects is typically ascribed to characteristics such as differences in initial outlay and project life span, disparities in the timing of cash flows, the reinvestment rate assumption, and the difficulties of multiple or no unique internal rate of return when the cash flows are non-conventional. Despite these differences among projects, the same required rate of return is used. The central question which is addressed in this article, is whether the same required rate of return can reasonably be used for the valuation of each of the mutually exclusive projects, as well as when a choice is made from among the mutually exclusive projects. In the discussion this 'conventional wisdom' of a constant required rate of return for both the valuations and the choice of an alternative is questioned, and it is suggested that one of the causes of a conflict in rankings may be the use of incorrectly specified required rates of return. Also presented in this article is a conceptual framework which enables a modified Fisherian analysis.

scholarly journals Capital budgeting practices in South Africa: A review

2012 ◽  
Vol 43 (2) ◽  
pp. 11-29 ◽  
Author(s):  
C. Correia
Keyword(s):  
South Africa ◽  
Cash Flow ◽  
Net Present Value ◽  
Financial Analysis ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Significant Growth ◽  
Internal Rate

This paper reviews the capital budgeting survey literature in South Africa over the period 1972 to 2008. The survey evidence indicates a significant growth in Discounted Cash Flow (DCF) methods and a fall in the use of other methods. In particular, there has been growth in the use of Net Present Value (NPV). Yet, the Internal Rate of Return (IRR) technique remains the primary method used in practice despite some serious drawbacks. Larger companies are more likely to use DCF methods. There has been a significant growth in the use of sensitivity analysis and scenario analysis. However, there is little use of sophisticated risk analysis tools such as Monte Carlo simulation, and decision trees. Although financial theory predicates the use of risk adjusted discount rates, surveys indicate that the majority of companies use a single firm discount rate. Companies have increasingly used inflation-adjusted cash flows but the process of ranking mutually exclusive projects is not aligned with finance theory. There is limited use of the Modified Internal Rate of Return (MIRR) method and DCF dominant companies do not outperform non-DCF dominant companies. The most important phase of project evaluation is the project definition and cash flow estimation phase and yet research studies have focused mainly on the financial analysis and project selection phase.

scholarly journals Capital budgeting practices used by selected listed South African firms

2011 ◽  
Vol 13 (1) ◽  
pp. 85-97 ◽  
Author(s):  
John Hall ◽  
Solly Millard
Keyword(s):  
South African ◽  
Net Present Value ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Industrial Firms ◽  
Budgeting Process ◽  
Local Research

This article investigates the application of capital budgeting techniques and the incorporation of risk into the capital budgeting process among a sample of South African industrial firms listed on the JSE Securities Exchange for at least ten years. Previous international and local research on this topic indicated a preference for the internal rate of return (IRR) as a capital budgeting method over the net present value (NPV), and that risk incorporation was relatively rarely incorporated into the capital budgeting process. The results of this study indicate that the NPV is just as popular as, and sometimes more so than, the IRR. Furthermore, compared to previous studies, risk is incorporated into evaluating capital budgeting projects more often. Sensitivity analysis is the most popular method, but adjustments to the cash flows and discount rate are becoming more popular. During the last decade the use of non-financial criteria to accept or reject a project has also increased in South Africa.

scholarly journals Evaluation of Investment Projects: A Case from Turkish Cement Sector

2016 ◽  
Author(s):  
Miyase Karabulut ◽  
Sıtkı Sönmezer ◽  
Vedat Zeki Yenen ◽  
Zeynep Emir
Keyword(s):  
Qualitative Research ◽  
Net Present Value ◽  
Capital Budgeting ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Investment Projects ◽  
Preliminary Results ◽  
Internal Rate ◽  
Exclusive Or

Capital budgeting is crucial for firms that have projects to evaluate especially when the projects are mutually exclusive or financing is scarce. The aim of the study is to determining the most widely used methodologies in capital budgeting decisions and their effectiveness. A qualitative research will provide cement sector specific examples in assessing industry projects and compares the methods of Net Present Value, İnternal rate of Return, Pay-back period, discounted pay-back period and MIRR. Each method is briefly discussed and its drawbacks and advantages are mentioned in detail. Other sectors are also examined in terms of capital budgeting. Our preliminary results indicate that net present value method dominates capital budgeting decisions in the sectors under study.

scholarly journals Use of Probabilistic Cash Flows in Analyzing Investments Under Conditions of Risk and Uncertainty

1976 ◽  
Vol 8 (2) ◽  
pp. 19-24 ◽  
Author(s):  
James W. Richardson ◽  
Harry P. Mapp
Keyword(s):  
Net Present Value ◽  
Average Rate ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Risk And Uncertainty ◽  
Small Farm ◽  
Perfect Knowledge ◽  
Net Returns

Managers of business firms, large or small, farm or nonfarm, must make investment decisions under conditions of risk and uncertainty. However, in evaluating investments, the assumption of perfect knowledge has often been used to simplify the analysis. For example, an estimate of average annual net returns is frequently discounted into perpetuity to evaluate a real estate investment alternative. Capital budgeting literature suggests a number of approaches to evaluating alternative investments. However, use of concepts such as the payback period, average rate of return, internal rate of return and net present value embodies the assumption of perfect knowledge.

scholarly journals Evaluating Financial Viability of Olive Mills Enterprise in Jordan

2014 ◽  
Vol 6 (4) ◽  
pp. 173
Author(s):  
Bassam Aldeseit
Keyword(s):  
Net Present Value ◽  
Cash Flows ◽  
Rate Of Return ◽  
Cost Ratio ◽  
Financial Viability ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Benefit Cost Ratio ◽  
Olive Oil Mills ◽  
Benefit Cost

The main aim of this study was to evaluate financial viability of olive oil mills enterprise. Thirty olive mills were investigated. A questionnaire was designed to obtain information from mills owners. The information obtained was mainly related to costs and returns. Cash flows were derived from costs and returns items of the enterprise. Three main discounted measures of project worth were used; these were Net Present Value (NPV), the Internal Rate of Return (IRR), and the Benefit Cost Ratio (B/C). The results of this study revealed that olive mills could be a viable encouraging, and profitable enterprise because of its capability to generate a highly positive and acceptable NPV (837966.05 JDs). The IRR (85%) and B/C ratio (2.3) values for this enterprise were economically accepted.

scholarly journals Wealth Accumulation in Rotation Forestry – Failure of the Net Present Value Optimization?

2019 ◽  
Author(s):  
Petri P. Kärenlampi
Keyword(s):  
Net Present Value ◽  
Cash Flows ◽  
Rate Of Return ◽  
Wealth Accumulation ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Direct Optimization ◽  
The Third ◽  
Financial Consequences ◽  
Appreciation Rate

We investigate wealth accumulation in forestry, assuming that revenues are re-invested. Three different optimization criteria are compared, two of which are based on cash flows, the third financially grounded. Direct optimization of wealth appreciation rate always yields best results. Procedures gained by maximizing internal rate of return are only slightly inferior. With external discounting interest rate, the maximization of net present value yields arbitrary results, with at worst devastating financial consequences.

scholarly journals Three Corporate Finance Practices in Pakistan: A Review of Previous Studies and Way Forward

2021 ◽  
Vol 3 (1) ◽  
pp. 61-84
Author(s):  
Umar Farooq ◽  
Bilal Haider Subhani
Keyword(s):  
Capital Structure ◽  
Corporate Finance ◽  
Net Present Value ◽  
Capital Budgeting ◽  
Payout Policy ◽  
Debt Financing ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Dividend Payout

This study reviews the empirical studies arranged on Pakistani capital market and specifies the pattern of three corporate finance practices.  The subject of corporate finance discusses the various activities performed at firm level such as capital budgeting, capital structure, and dividend payout policy. The capital budgeting technique consists of six methods i.e., net present value, discounted cash flow, payback period, and internal rate of return etc. but Pakistani firms often interested in net present value and internal rate of return for capital investment evaluation. Similarly, the capital structure decision carries the debate on two options of financing i.e., debt financing and equity financing but literature shows that the Pakistani firms generally follow the pecking order theory and prefer more debt financing. Similarly, as for concern dividend payout policy, literature discusses the different theories and determinants but still unable to generalize the dividend payout trend specifically in Pakistani context. Corporate managers and policymakers can use the conclusion for strategic purposes.

scholarly journals Kelayakan Bisnis Café “Kopdar” di Tangerang Selatan Dari Aspek Kriteria Penilaian Investasi

2020 ◽  
Vol 4 (1) ◽  
pp. 105-113
Author(s):  
Syam Ruddin
Keyword(s):  
Net Present Value ◽  
Financial Analysis ◽  
Payback Period ◽  
Discount Factor ◽  
Rate Of Return ◽  
Primary Data ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Internal Rate ◽  
Return Value

The purpose of this study is to analyze the feasibility of "Kopdar" café business in South Tangerang. The focus of the business feasibility analysis is on the financial or financial aspects. This research is a quantitatively descriptive. The type of data used is primary data. While the method used is by means of financial analysis which includes Payback Period (PP), Net Present Value (NVP), and Internal Rate of Return (IRR). Based on the results and discussion, it is known from the three methods of financial analysis used above that it can be concluded that the investment in the café business in South Tangerang is financially feasible and can be accepted and continued. The results showed that PP is 6,149 months, or shorter than PP in the study area, which ranged from 9 to 24 months. Meanwhile NPV of Rp. 7,792,518.52 where the results of this NPV value show positive results. While IRR of 12.284%, higher than the return value prevailing in the market (discount factor) which is currently around 6.50%. Abstrak Tujuan penelitian ini untuk menganalisis kelayakan usaha café “Kopdar” yang ada di Tangerang Selatan. Adapun fokus analisis kelayakan usaha adalah pada aspek keuangan atau finansial. Penelitian ini bersifat deskriptif kuantitatif. Jenis data yang digunakan adalah data primer. Sedangkan metode yang digunakan adalah dengan cara analisis finansial yang meliputi Payback Period (PP), Net Present Value (NVP), dan Internal Rate of Return (IRR). Berdasarkan hasil dan pembahasan, diketahui dari ketiga metode analisis finansial yang digunakan di atas dapat disimpulkan bahwa investasi bisnis café yang ada di Tangerang Selatan dari aspek finansial layak dan dapat diterima serta dilanjutkan. Dari hasil penelitian menunjukkan bahwa PP adalah 6,149 bulan, atau lebih singkat dari PP yang ada di daerah penelitian yaitu berkisar antara 9 sampai 24 bulan. Sementara itu NPV sebesar Rp. 7,792,518.52 di mana hasil dari nilai NPV ini menunjukkan hasil yang positif. Sedangkan IRR sebesar 12,284 %, lebih tinggi dari nilai return yang berlaku di pasar (discount factor) saat ini yaitu sekitar 6,50 %. Kata Kunci : Analisis Kelayakan, Aspek Finansial, PP, NPV, IRR

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