MBS546 - Capital Budgeting Methods - Finance Assignment Help

Assignment Task

Capital Budgeting Methods

(1) Net Present Value (NPV)

(2) Payback Period

(3) Internal Rate of Return (IRR)

Limitation: Use profits and not cash flows

Profits based on accrual accounting and profits include non-cash flow items eg. depreciation

NPV is most superior method à if there is conflict à final decision is based on NPV.

Why is NPV superior method? Limitations of other methods:

Payback Period – ignore cash flows after payback

IRR – can only be used cash flows

PI – unable to distinguish project size

AAR – uses profits

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