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Capital Budgeting techniques..

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Haider Sabir

Capital budgeting techniques are used to analyze whether to accept or reject large investment projects. These techniques include payback period, net present value (NPV), and internal rate of return (IRR). Payback period measures the length of time to recover investment costs, with shorter periods preferred. NPV compares the present value of cash inflows to initial investment, preferring projects with values greater than zero. IRR equates project NPV to zero and prefers projects with rates higher than the cost of capital.

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Capital Budgeting Techinuqes ï‚— Use to analyze whether to accept or to reject the project. ï‚— Process in which business determines and evaluates investments that are large in nature
Techniques ï‚— Payback Period ï‚— NPV ï‚— IRR
Length of time required to recover cost of an investment. Used to evaluate proposed investments. Formula for annuity case.
Decision Criteria ï‚— If payback period is less than maximum acceptable payback,project is accepted. ï‚— If it is more than maximum payback period,it is rejected.
Net Present Value(NPV) ï‚— Minimum return that must be earned on project. ï‚— Present value of all cashflows equals to O. ï‚— Formula:Present value of cashflows-initial investment.
Decision Criteria for NPV ï‚— If NPV is greater than O,accept the project. ï‚— If smaller than O,project rejected
Internal Rate of Return ï‚— It equates NPV of investement opportunity with O. ï‚— Widely used technique.
Criteria ï‚— If the IRR is greater than cost of Capital,accept the project. ï‚— If it is less,reeject it ASAP.
Which Approach is better ï‚— In theoretical view,NPV is more better approach. ï‚— In Practical view,IRR is better

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Capital Budgeting techniques..

  • 1. Capital Budgeting Techinuqes ï‚— Use to analyze whether to accept or to reject the project. ï‚— Process in which business determines and evaluates investments that are large in nature
  • 3. Length of time required to recover cost of an investment. Used to evaluate proposed investments. Formula for annuity case.
  • 4. Decision Criteria ï‚— If payback period is less than maximum acceptable payback,project is accepted. ï‚— If it is more than maximum payback period,it is rejected.
  • 5. Net Present Value(NPV) ï‚— Minimum return that must be earned on project. ï‚— Present value of all cashflows equals to O. ï‚— Formula:Present value of cashflows-initial investment.
  • 6. Decision Criteria for NPV ï‚— If NPV is greater than O,accept the project. ï‚— If smaller than O,project rejected
  • 7. Internal Rate of Return ï‚— It equates NPV of investement opportunity with O. ï‚— Widely used technique.
  • 8. Criteria ï‚— If the IRR is greater than cost of Capital,accept the project. ï‚— If it is less,reeject it ASAP.
  • 9. Which Approach is better ï‚— In theoretical view,NPV is more better approach. ï‚— In Practical view,IRR is better