See details below Essay Example | Topics and Well Written Essays - 1250 words

See details below - Essay Examplepp2-3) in which the project is either genuine or rejected based on its encourage addition to the buckram and the shareholder wealth. The author showed that the hail of chapiter of a project is marginalized to maximize the shareholder wealth by including target of interest, the required rate of return to stock holders, corporate marginal income tax rate, debt to equity ratio and lifetime of the proposed project and the charge average cost of capital. In a paper written by the same author subsequent (Beranek. 1980. pp404-405) claimed that the Net Present Value rankings of the investment opportunities do not match equity market value unless the projects are of one period duration or are solely equity financed. He schematic the widely used criteria of accepting a project only if its Present Value is greater than goose egg and recommended that the project among multiple Mutually Exclusive projects having highest Present Value should be chosen. H owever, Beranek (1975. pp17) warned of some practical challenges in implementing this technique in capital budgeting overdue to uneven cash flows, non-straight line income tax & other depreciations, change methods of repaying the debts, different treatment of shareholders between capital gains & dividends, errors in calculation of weighted average cost of capital in finite lived projects, etc.His fears were not unreasonable in those years given the current edification of capital budgeting procedures that takes into account complex metrics like risk analysis (both systematic & non-systematic), computerized simulations & stress tests, inflation, etc. In fact Pike (1984. pp95) carried out a broad level research on kind between sophistication of capital budgeting and firm performance to conclude that higher sophistication of capital budgeting impacts firm performance negatively.Overall, Net Present Value has remained the just about trusted method to evaluate capital budgeting deci sions due to its shear advantage of evolving the time value of money. Majority of expansions, new operations or replacement decisions are based on NPV technique (Sun & Queyranne. 2002. pp528). Although NPV has some pitfalls especially when the inputs to the NPV calculations (like interest rates, risk perceptions, etc.) vary considerably, it is the most effective technique to evaluate the true value of capital budget when evaluating the returns from a project. It may up to now not give a complete picture of returns from an accepted project and hence the Internal send of Return (IRR) technique should be used along with the NPV technique.Cash Flow Estimation under majuscule Budgeting - Issues and ResolutionsMost of the analysts associate larger risks with projects that are of longer durations. This is because the speculations of risks, interest rates, inflation, etc. become more aleatory for longer durations. The NPV technique is perfect for a single duration project but if the in puts vary as well as much (like interest rates vary considerably within a short span of time), the project can no-longer be treated as single duration. Beranek (1980. pp404) presented an empirical