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If the present and future cash outflows are likely to be greater than present and future inflows, a negative number must be calculated for that net cash flow.
Keywords: SME’s, Capital Budgeting, South Africa How to cite this paper: Hall, J.
Capital Budgeting Forecasting is important in modern business, moreso now that globalization is a fact and markets fluctuate more rapidly.
It is, in fact, the lifeblood of the business, needed to fund working capital to enable it to run effectively.
Expenses and investments must be made against delays and uncertain sales levels.
Net Present Value: Net Present Value, otherwise known as NPV, is an accounting term used in capital budgeting where the present value of net cash inflow is subtracted from the present value of cash outflows.
Then this value is compared with projected profit ratios for the project in the future.
One dichotomy is that often accounting techniques (earnings, etc.) are used for this process (rate of return, return on investment), while most economists see this as too simplistic and an improper use of the data (Dayananda, , 2008; Ansari, 2000).
There are three major methods used in capital budgeting, each with their own specific set of strengths and weaknesses: Net Present Value (NPV), Internal Rate of Return (IRR), and Modified Internal Rate of Return (MIRR).
It was identified by the review that non-sophisticated methods of capital budgeting and risk assessment are still being used, and this needs to be studied.
Additionally, risk assessment methods were revealed to be not sophisticated, which can become part of a future study.