Question

Identify two types of investments or projects on which you think a company would use capital budgeting techniques.

Answer 1

Replacement projects:

Replacement project includes replacing an existing machine with a newer one or choosing a machine over another. These decisions needs a lot of anaysis and use of capital budgeting techniques to choose the project.. A project with a higher NPV, IRR and MIRR greater than cost of capital should be chosen. Other capital budgeting methods such as payback period and profitability index can be used.

Expansion projects:

These type projects involves increasing the size of the business. The future cash flows can be more uncertain as compared to replacement projects. These type of projects include increasing the sales of a product or launching a new product. Therefore, a careful and detailed analysis is required before coming to a conclusion. Captial budgeting techniques such as NPV, IRR, MIRR, profitability index and payback period can be used.