According to Kenton (2018), ideally, businesses should pursue all projects and opportunities that enhance shareholder value. However, because the amount of capital available for new projects is limited, management needs to use capital budgeting techniques to determine which projects will yield the most return over an applicable period (link (Links to an external site.)).
Describe two basic concepts of capital budgeting from the following list:
• Independent vs. Mutually Exclusive Projects
• Throughput Analysis
• Net Present Value
• Capital Rationing
• Sunk Costs
• Opportunity Costs
• Discounted Cash Flow
• Internal Rate of Return
Then, answer the following question and comment:
- Why is each concept important for businesses to consider in the capital budgeting process?
Sample Solution