What are the four capital budgeting decision criteria?

namely: 1) discounted payback period, 2) net present value, 3) modified rate of return, 4) profitability index, and 5) internal rate of return.

What are capital budgeting decision rules for IRR and NPV?

Definition: The discount rate that sets the NPV of a project to zero is the project’s IRR.

  • Standard Rule: Accept a project if its IRR is greater than the appropriate market based discount rate, reject if it is less.
  • For independent projects with “normal cash flow patterns” IRR and NPV give the same conclusions.

    • Is the most important rule in capital budgeting decisions?

    Net Present Value is the most important tool in capital budgeting decision making. It projects the financial value of the project for the company.

    What are the types of capital budgeting decisions?

    Kinds of Capital Budgeting Decisions:

    • (i) Mutually Exclusive Projects:
    • (ii) Accept-Reject Decisions or Acceptance Rule:
    • (iii) Capital Rationing Decision:
    • (a) Type of Industry:
    • (b) General Economic Conditions:
    • (c) Degree of Faith the Executives have in Long-range Planning:

    What are five methods of capital budgeting?

    5 Methods for Capital Budgeting

    • Internal Rate of Return.
    • Net Present Value.
    • Profitability Index.
    • Accounting Rate of Return.
    • Payback Period.

    What is the decision rule for IRR?

    How Is the IRR Rule Used? Essentially, the IRR rule is a guideline for deciding whether to proceed with a project or investment. So long as the IRR exceeds the cost of capital, the higher the projected IRR on a project, the higher the net cash flows to the company.

    What is the decision rule for NPV?

    The decision rule for NPV is to accept the project if the NPV is positive and reject the project if the NPV is NPV is negative. The decision rule for IRR is to accept the project if the IRR equals or is greater than the required rate of return and reject the project if the IRR is less than the required rate of return.

    Which is the element of capital budgeting decision?

    Capital Budgeting Decisions are based on: Incremental Profit. Incremental Cash Flows. Incremental Assets.

    What are the factors affecting capital budgeting decisions?

    Factors affecting Capital Budgeting Decisions (CBD)

    • Technological changes: Before taking CBD, management must undertake in-depth study of cost of new product /equipment as well productive efficiencies of new as well as old equipment.
    • Demand forecast:
    • Competitive strategy:
    • Type of management:
    • Cash flow:
    • Other factors:

    What is the difference between NPV and IRR?

    What Are NPV and IRR? Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. By contrast, the internal rate of return (IRR) is a calculation used to estimate the profitability of potential investments.

    What is the NPV decision rule?

    The net present value rule is the idea that company managers and investors should only invest in projects or engage in transactions that have a positive net present value (NPV). They should avoid investing in projects that have a negative net present value. It is a logical outgrowth of net present value theory.