Question

choose at least 3 of the capital budgeting techniques mentioned in this module (payback, npv, irr, etc.) and discuss what information they provide for us, as well as their accept/reject criteria.

Answer 1

Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period are three capital budgeting techniques that provide information about the profitability and investment viability of a project. The accept/reject criteria for NPV is positive NPV for acceptance and negative NPV for rejection; for IRR, the criteria is a higher IRR than the required rate of return for acceptance and a lower IRR for rejection; and for Payback Period, a shorter payback period is preferred.

Step-by-step explanation:

Capital Budgeting Techniques:

1. Net Present Value (NPV): NPV measures the estimated profitability of an investment project by calculating the present value of its expected cash flows. A positive NPV indicates that the project is expected to generate more cash inflows than outflows, making it a good investment. The accept/reject criteria for NPV is: if NPV is positive, accept the project; if NPV is negative, reject the project.
2. Internal Rate of Return (IRR): IRR is the discount rate that makes the present value of cash inflows equal to the present value of cash outflows. It represents the rate at which the project breaks even. The accept/reject criteria for IRR is: if IRR is greater than the required rate of return, accept the project; if IRR is less than the required rate of return, reject the project.
3. Payback Period: Payback Period measures the time required to recover the initial investment in a project. It is calculated by dividing the initial investment by the expected annual cash flows. The accept/reject criteria for Payback Period varies depending on the industry and company, but a shorter payback period is generally preferred.