The Use of Net Present Value Method in Capital Budgeting Decisions - Essay Example

Risk and return have a positive relationship. Securities that have higher risks will generate higher profits. Risk adverse investors prefer investment options with low or cero risk such as Treasury bills. The rate of return of common stocks is higher than Treasury bills due to the higher risks associated with common stocks. The value of a firm can be estimated using financial models such as the dividend discount model (Nyu). There are various factors that determine the risks of a project. Three of those factors are location of the project, timeline requirements, and quality of the labor provided by the project manager and team members.

The funding available for a project is another variable that influences the success of a project. Projects that have unlimited funding have a greater chance of success than underfunded projects. A major financial decision companies make is deciding the composition of the capital structure of the firm.