Capital Budgeting Process

Today we will be looking at the key financial metrics of the capital budgeting process for an analysis of a possible investment for Strident Marks. I have calculated the payback period, the net present value, and the internal rate of return. Each of these is important to Strident Marks so we can make proper decisions about this possible investment. I am attaching the Excel sheet that I completed my calculations on also. It is important to understand how each of these calculations will help us make the proper decision and also how each of the calculations is completed.

The payback period is the length of time that is required for Strident Marks to cover the initial investment for the proposed project (Gitman, 2006, p. 419). I have calculated the payback period for this particular project in the Excel sheet that is attached. I calculated by using the initial investment and the cash flows that were in the original data that I received about this project. The easiest way to figure this is to divide the initial investment by the cash inflows (Gitman, 2006, p. 420). We can do this because the cash inflows are the same for each year, which is $7500. Our initial investment was $10000. Therefore $10000 divided by $7500 gives us 1.33 years. This equals one year and four months to get back our initial investment. This means that the initial investment would be covered with the first year cash inflow and one/third of the second year cash inflow.