Capital Budgeting Techniques

1. Net Present Value Method

1.1. NPV = PV Cash Inflows - PV Cash Outflows

1.2. If Net PV is Positive = Acceptable

1.3. If Net PV is Zero = Acceptable

1.4. If Net PV is Negative = Not Acceptable

2. Internal Rate of Return

2.1. Represents actual rate of return from investment project

2.2. If IRR = or > than min required rate of return = Acceptable

2.3. If IRR < than min required rate of return = Not Acceptable

3. Payback Period

3.1. Payback Period = Initial Investment/Net Annual Cash Inflow

3.2. Length of time it takes for project to generate enough cash inflows to recover initial cost

4. Accounting Rate of Return Method

4.1. Acct Rate of Return = Annual Net Income from Project/Initial Investment from Project

4.2. Does not Focus on Cash Flows like others

4.3. Focuses on Net Income