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