Running head: CAPITAL BUDGETING 1

Capital Budgeting Discussion

Name

Institution
CAPITAL BUDGETING 2

Capital budgeting discussion

Capital budgeting technique is also known as the investment appraisal and represent the

mechanism by which companies determine the viability of the capital project. Moreover, the

methods are also used to tell whether an existing asset is worth replacement (Tirole, 2010). The

capital budgeting techniques are grouped into discounting and non-discounting techniques.

Discounting techniques are mostly the traditional appraisal techniques and include the payback

period, accounting rate of return and profitability index. Again, the non-discounting methods do

not take into account the time value of money. The primary discounting techniques include the

net present value and internal rate of return. Net present value takes into account the cash inflows

and the cash-out flow from a given project (Bierman & Smidt, 2012). A project with a positive

NPV should be accepted as viable for investment. IRR, on the other hand, equates the present

value from a given project to zero and represent the percentage of return that is likely to be

realized from a project.

McCormick & Company should go ahead and build the new plant and purchase the

equipment because the project has a positive expected cash flow of $ 146.30 million. The

investment has a positive net present value of $ 99 million, stipulating that it is viable for

investment. Lastly, the project has a higher internal rate of return of 93%. The IRR is higher than

the project weighted average rate of return of 9.24%, thus a 10 times level of return to the

company. By considering NPV and IRR, McCormick & Company should build the new plant

and purchase the equipment because the investment will generate a stream of profit to the

company.
CAPITAL BUDGETING 3

References

Bierman Jr, H., & Smidt, S. (2012). The capital budgeting decision: economic analysis of

investment projects. Routledge.

Tirole, J. (2010). The theory of corporate finance. Princeton University Press.