Capital budgeting, present value, IRR, profitability index | Free template
Capital budgeting with calculations of present value, IRR and profitability index is a free template to decide on an investment based on calculations with the net present value method and the internal interest rate method for one or more investment alternatives.
A present value calculation is a capital budgeting method that discounts all future cash flows to present value, the value today, by using a rate for cost of capital. In a net present value calculation we take into account the initial investment that occurs directly, we account for receipts and payments arising from the investment in the future and a possible residual value or salvage value when the useful life is over. When one takes into account the initial investment, the final result is called net present value and when no account of the initial investment is taken the end result is known as present value.
If the net present value is positive, the investment is profitable and should therefore be taken, if the net present value is negative, the investment is not profitable and therefore should not be taken. A present value calculation can be used to compare different investment alternatives, but difficulties in the comparability of net present value can arise when the initial investment or the economic life differs between investment alternatives.
In order to compare different investment alternatives with different initial investments you can compare on profitability index which are the net present value in relation to the initial investment. The IRR, internal rate of return, can be used to compare different investment alternatives with differences in initial investments and economic life. This template for capital budgeting with present value includes measures of profitability index and IRR.
This template for calculation of present value, IRR and profitability index assumes real cash flows before tax. When estimating future cash inflows and cash outflows you should not make any compensation for inflation, nor shall any deduction for tax be made. When cash flows are real and the cost of capital rate used is adjusted for both inflation and taxes the cost of capital measure is a real cost of capital rate before tax.
The cost of capital rate is calculated as a weighted average of the return from shareholders and the average interest rate from lenders, WACC. The weighing of the capital from shareholders and lenders is made on the basis of how the investment will be financed.
You can use this template to calculate present value, IRR and profitability index to aid in decisions on whether an investment should be taken or which investment that should be taken.
01-01-2015 | Created by All-templates.biz
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