Budgeting Signature Assignment. The Risk Factor of Capital Budgeting

The concepts of budgeting
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The Risk Factor of Capital Budgeting
The increase in volatility of the global economy forces investors to make use of the capital budget when choosing their investments. A capital budget is a plan for the long-term investment of the assets such as machinery and the buildings. With these investments, the risk is inevitable. Some of the risks involved comprise the management sinking the invested funds in risky projects, the risk of the investee company collapsing and failure to pay the cash flows in time as per the agreement. Valuing long-term business investment can be challenging due to various uncertain factors to put into consideration. Capital budgeting can be used to compare projects. Normally, against the risk, the business person needs a premium over and above the existing one which is risk-free. Therefore, the more uncertain the future return will be, the more the risk and the greater the premium and the vice-versa.
Consequently, the risk premium gets introduced in decisions in capital budgeting with the help of the discount rate. Future cash flows are discounted due to the needed rate of return for the project. Investors can minimize losses by incorporating risk in capital budgeting (Bierman & 2012). 
Risk premium - the investors, by all means, try to avoid risk. Increasing returns for risky projects as compared to less risky investments is one of a way of encouraging investors to invest in such risky projects. A risk premium refers to a rate of discount that is added to the risk-free rate borrowing.
The risk occurs in investment evaluation since it is not possible to anticipate the occurrence of the possible future events with consequently and certainty. It is also not possible to make any accurate predictions to the cash flow sequence. As such, risk associated with the project is defined as the variability that is expected to take place in future returns from the project. The project becomes riskier with an increase in the variability of the expected returns. Coefficient variation and standard deviation can be used to measure the risk (Saita, 2010). 
Identifying capital budgeting techniques, examining their effects on corporate strategy of investment selection
Capital budgeting techniques are used to evaluate the feasibility of long-term investments. As such, decisions regarding capital budgeting are one of the vital financial decisions that relate the choice of the investment proposal or the line of action that will produce benefits in the future over the existence of the project. Both modern and traditional budgeting techniques are used by the organizations to make a judgment on the feasibility of these projects. The modern method involves discount criteria whereby the time value of money is considered while the traditional method depends on the non-discount criteria that never put time value of the money into consideration. Modern technique methods include Profitability Index, Internal Rate of Return, Modified Internal Rate of Return and the Net Present Value Method. On the other hand, traditional technique methods include the Average Rate of Return and the Payback Period Method (Hasan, 2013).
Payback method: Payback method is the easiest means to budget for a new asset. It involves deciding the period that the company will take to pay off an asset. The company can recover the cost of a new piece of equipment in case of a quicker payback period.
The internal rate of return method (IRR): The internal rate of return method is a complex method which involves a comparison of the return on the asset to the cost of financing the project. The project is expected to be profitable in cases when the IRR is above the cost. However, in case the costs surpass the return, then the project is expected to make a loss.
Net present value (NPV) method: The NPV is similar to the payback method except for one important factor for money not keeping the same value over time. As such, the difference between discounted cash flows and the asset cost from the asset is calculated. Since cash flows drop in value, the term ‘present value' is used. The project is expected to make a profit in case the discounted future cash flow surpasses the cost of the asset. The greatest advantage of the NPV method over the payback method is the reality it accounts the decreased value of the dollar over time. Its greatest drawback is that it is based on an assumption. In case the company experiences unexpected pitfall after the investment of money, probably it may be due to wrong calculations resulting in uncertainty in the profit margin (Bierman & Smidt, 2012). 
The two methods are common in the sense that they are based on the cash outflows and cash inflows of the project.
Profit index: This is the ratio of the present value of cash benefits in the future, at the needed rate of return of the initial cash outflow of the investment. It can be either net or gross, net simply being gross minus one.
Measuring Investment Value and Analyzing processes in foreign investments
Investment value is the value of a property to a specific investor. Also, it can be referred to as the amount of money that an investor pays for a property. In the UK and US, it is equal to the market value for the investors with the ability to put the property its best and highest use. For the other investors with restricted vision or capacity, they have lower investment value because it becomes almost impossible to put the property to use in a manner that is maximally productive.
Prospective investors usually adopt an investment value metric when they focus on investing in the property with specific personal investment targets in mind. They may be looking for a return on investment rate in an investment. Beliefs of a specific investment strategy motivate the value metric.
The Relevance of Investment Value
Investment value is important to the potential buyers of the property for purposes of comparing prices of the real estate to the expected rate of return. By identifying the specific return rate, it becomes possible for the investors to measure the final results of the investment with the proposed price they are supposed to pay for the property. It enhances the investor to undertake wise purchasing decisions that match their investment objectives.
Ways of Determining Investment Value
Investment value is unique to each investor since the investment value depends on the objectives of the investor. Different investors can make use of the same valuation method and establish varying investment values. Investors have a variety of valuation methods to use when finding out the investment value of an asset.
Some of the common investment values include:
Comparable sales: In this case, the investor compares simil...