Financial managers utilize capital budgeting techniques like NPV and IRR to evaluate business investments for profitability.
Capital budgeting techniques are crucial tools for financial managers to assess the viability of investments. One key method is to calculate the Net Present Value (NPV), which considers the project's cash flows and the time value of money. Additionally, using the Internal Rate of Return (IRR) helps in determining the project's profitability.
Let's consider a manufacturing company deciding to invest in a new production line. By estimating the project's cash inflows and outflows over its useful life, calculating the NPV, and comparing it to the required rate of return, the financial manager can determine if the investment is financially sound.
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