Capital Budgeting Decision Techniques

1.NPV

NPV(Net Present Value), is the present value of a project's cash flow minus the present value of its cost, it means that how much the project could create to shareholders' wealth, the more the NPV, the more value the project makes and the higher the stock's price. If NPV equal to zero means the cash flow which the project makes can compensate for the cost of investment, the rate of return equal to required rate of return. If NPV exceeds zero, the part of exceeded belongs to shareholders. Accept the project which has a positive NPV will create positive economic value added and market value added.

In this case, it can be seen clearly from Table 1, SSW and CCS both has a positive NPV, they all create value and wealth for the company. What should be mentioned is that, the NPV of SSW is higher than CCS, it means SSW could add more value than CCS.

2.IRR

IRR(Internal Rate of Return ) is the discount rate that make the inflows to equal the initial cost, in other word, it makes NPV to equal to zero. IRR is an estimate of expected project's rate of return. If this return exceed the cost of the capital used to the project, the part of difference is a dividend to shareholders and causes the stock's price to rise. If the IRR is less than cost of capital , shareholders have to make up.

In this case, the cost of capital of these two restaurants both equal to 10%, the Table 2 shows that the IRR of SSW is 28.35% and the IRR of CCS is 31.08% , both higher than 10%. But CCS has a higher IRR than SSW.

3.PP

PP(Payback Period) is the number of years required to recover the capital invested in a project from its operating cash flow. The shorter the payback, the greater the project's liquidity.

In this case, CCS has a shorter PP which can be seen in Table 3, it means that CCS has better liquidity and less risk.

4.NPV Profile

We can get NPV profile through plotting different value at a number of different