adamriofc Capital Budgeting
Decides whether a capital expenditure creates value: accept if NPV > 0 and IRR > WACC.
Decision Rules
- NPV > 0 → value is created; NPV < 0 → value is destroyed (use
engines/npv.js). - IRR > WACC → the project covers its cost of capital (use
engines/irr.js); compare them — do not use IRR alone when cash flows are unconventional. - Payback period = investment ÷ average annual cash flow — a liquidity aid, not a substitute for NPV.
- Simple WACC = (E÷V × ke) + (D÷V × kd × (1 − tax rate)) — for SMEs: ke = owner's expected return, kd = effective loan interest rate.
Hybrid Execution Model
Pass cashflows: [−investment, cf1..cfn] to engines/npv.js (npv(rate, cashflows)) and engines/irr.js (irr(cashflows, {tolerance: 1e-9})). Trust Envelope: risk MEDIUM, standard basis (not statutory), requires_human_review: true for fund commitments.
Scope & Safety
- Use for: machine purchases, branch expansion, project investments — incremental after-tax cash flows.
- Do not use for: portfolio/stock decisions (not finance core), projects with multi-sign cash flows without further analysis.
- The IRR engine throws "No IRR found in range" when cash flows are unconventional — use NPV as the primary decision.
- Make sure tax rates & interest are actual (check tax-payroll-id) — do not assume.
Worked Example
Input: machine 2 billion; net cash flow 600 million/year × 5 years; WACC 12% (ke 15% × 60% + kd 10% × 40% × (1 − 22%)). Output: NPV @12% = 600 million × annuity factor 3.6048 − 2 billion = +162.9 million (> 0 → accept); IRR ≈ 15.2% (> 12% ✓); payback = 2 billion ÷ 600 million ≈ 3.3 years. Recommendation: feasible provided the incremental cash flows materialize.