In carrying out projects, there are projects that may require the top management to invest in infrastructure, construct new buildings or acquire new cars. When a budget involves buying new assets, the project manager and top management team have to make use of capital budgeting.
In this article, I want to talk about the factors and mathematical calculations that needed to be done when capital budgeting is involved in a project.
#1 Discounted cash flow
According to Investopedia, a discounted cash flow is a valuation method that is used to estimate the attractiveness of an investment opportunity.
Discounted Cash Flow uses future free cash flow projections and discounts them to arrive at a present value estimate which is been used to evaluate the potential for investment. According to them, if the value arrived at through Discounted Cash flow analysis is higher than the current cost of the investment, the opportunity may be a good one.
Take, for instance, I want to buy new machinery that will cost me about one hundred thousand naira. I have to look at how to proceed will be coming in after I might have purchased the equipment. If I see that I could make about four hundred thousand naira at the end of the day, then it is a good investment.
#2 Net present value
According to Investopedia, Net Present Value is the difference between the present value of cash inflows and the present value of cash outflows. Net Present Value is used in capital budgeting to analyze the profitability of a projected investment or a project.
There was a time last year that Dollar exchange rate was N200 (Two hundred naira) to a dollar but now the exchange rate is almost N350 to a dollar. If you don’t put that into consideration as a Project Manager, you will likely have an abandoned project.
Now your take on this argument.
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Adeniyi Salau (CCNA,CDMP, CEP, MOS, MCP, CSCU (Project 2016) is a Google and Beingcert Certified Digital Marketer, Project Manager and SEO Expert of repute with about a decade of Blogging and online marketing experience. He is always ready to share his experience with others.