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2. CAPITAL-BUDGETING PRINCIPLES AND TECHNIQUES (ALTERNATIVE INVESTMENT…
2. CAPITAL-BUDGETING PRINCIPLES AND TECHNIQUES
NET
PRESENT VALUE
It must
focus on cash and only cash
account for the time value of money
account for risk
Formula for NPV
Net present value= Initial cash investment + present value of future cash flows
I0= initial cash investment
k= is the cost of capital for the project
n=is the economic life of the investment
CFt= is the cash flow in period t
ALTERNATIVE INVESTMENT EVALUATION CRITERIA
Non discounted cash flow criteria
Payback Period
Decision Rule
Strengths and weakness
Accounting rate of return
SURVEYS
% of CFOs who always or mostly always use a given technique
IRR 75.7%
NPV 74.9%
Payback 56.7%
Rate of return 20%
CONCLUSIONS
Net present value
Internal rate of return
Profitability index
payback period
Accounting rate of return