Capital Projects and Strategic Direction Essay Example | Topics and Well Written Essays - 500 words

Capital Projects and Strategic Direction - Essay Example (Bender & Ward, 2002) A typical process to evaluate a project involves assessing its net present value by discounting the future cash flows of a firm with appropriate discount rate and deducting the resulting amount from the total capital outlay spent on the project. If the net present value of the project is positive it adds value to the firm and if it is negative, it could not add value to the firm. The value addition proposition of the capital projects is therefore their net present value. If the net present value is positive, it adds value to the firm and the shareholders. Positive NPV of the project therefore is considered as the key criteria for adding value to the firm. If NPV of the capital project is negative, it is assumed that it will not add value to the firm and hence could not maximize the value of the firm or the value for the shareholders. Major capital projects with positive NPV help the organization’s stock prices to increase by such projects give a signal to the investors that the firm is adding more capacity to it and expanding its markets. Expansion through new capital projects therefore also allow the firms to increase the future cash flow generation of the firm and hence increase their share prices also.