Capital budgeting techniques

There are different methods of analyzing the viability of an investment. The preferred technique should consider time value procedures, risk and return considerations and valuation concepts to select capital expenditures that are consistent with the firm’s goals of maximizing owner’s wealth.

Capital budgeting techniques are grouped in two:

1.Non-discounted cash flow techniques (traditional methods)

  • Payback period method (PBP)
  • Accounting rate of return method (ARR)

2.Discounted cash flow techniques (modern methods)

  • Net present value method (NPV)
  • Internal rate of return method (IRR)
  • Profitability index method (PI)
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