Is the entire process of planning and decision-making regarding the expenditure of the Fund in which the Fund's return period exceeds one year's time. Limit one year period of time is not absolute. Including the expenditure and this is the expenditure of funds for the purchase of fixed assets (plant investment), i.e. land, buildings, machines and other equipment. Similarly, the expenditure of funds for the project advertising the long term, research and development as well as in the "capital budgeting expenditures"

### Capital Budgeting steps

- Project costs must be specified
- Management must estimate the cash flow expected reply from the project, including the final value of assets
- The risk of cash flow of the project should be being estimated. (cash flow probability distribution of wear)
- By knowing the risks of the project, management must determine the capital costs (cost of capital) the reply right for discount cash flow project
- By using the time value of money, the cash flow expected entry is used to estimate the value of the assets.
- Lastly, the present value of the expected cash flow lucrative compared to costs.

### The difference in NPV and IRR

#### The method of Net Present Value (NPV)

are the proceeds or cash flows that are discounted on the basis of capital costs (cost of capital) or rate of return. Desired. First calculated in this method is the present value (present value) of the expected proceeds on the basis of the "discount rate". Then the amount of the "present value" (PV) of the overall proceeds as long as his age is reduced by the amount of PV investment (initial investment). The difference in capital spending from PV between (capital outlay or initial investment) is called the net present value. (Net Present Value)

####

The method of Internal Rate of Return (Yield Method)

Is an interest rate that's making the amount of the present value of the expected proceeds will be received (PV of future proceeds) equal to the amount of the present value from spending capital (PV of capital outlays) are basically "internal rate of return" should be sought by means of "Trial and error" with the versatile try. First of all calculate PV of the proceeds from an investment by using the interest rate that is selected according to whatever we do. Then the calculation result was compared to a PV from the outlay. If the PV of the proceeds are greater than the PV of the investment or the outlay, we should use higher interest rates again.

This method of ranking investment proposals to make using a rate of return on investment is calculated by finding the discount rate that equates the present value of cash flows entering the expected project value now the cost of the project or the same as the discount rate that makes the NPV equal to zero. the general formula With the following:

**Ao = A1/(1 + IRR) 1 + A2/(1 + IRR) 2 + ... + An/(1 + IRR) n**In Ao is an investment in the period 0 and A1 until the 50s was a period of net inflow of 1 to n, then the IRR method is merely seeking the discount factor that equates A0 with A1 until An acceptance or rejection of this investment proposal is to compare IRR with the interest rate required (required rate of return). If the IRR is greater than the interest rate required then the project is accepted, in smaller acceptable. The weakness fundamentally according to theory is indeed almost none, but in practice the calculation to determine the IRR is still requires counting NPV

#### Comparison of NPV and IRR

If There is one project that is independent then the NPV and the IRR will always give the same recommendation to accept or reject the proposed project, but if there is a proyek2 that is mutually exclusive, NPV and IRR does not always give the same recommendation. The ni thing caused by two conditions:#### The size of the different projects, one bigger than the other

The time difference. The timing of the flow of cash from two different projects. One project flow kasnya occurred in the early years of the project while others flow kasnya occur in later yearsThe bottom line is for projects which are mutually exclusive, so the right choice IE the project with the highest NPV.

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