Capital budgeting techniques.

Full Answer Section Other capital budgeting techniques include:

• Modified internal rate of return (MIRR): MIRR is a modification of IRR that takes into account the time value of money.
• Discounted cash flow (DCF): DCF is a general term for any capital budgeting technique that uses discounted cash flows.
• Real options: Real options are the right, but not the obligation, to make a future investment decision. Real options can be used to increase the value of an investment project.

Capital budgeting techniques are used to arrive at investment decisions by comparing the expected benefits of an investment to the expected costs. The technique that is most appropriate for a particular investment will depend on the specific circumstances of the investment. For example, NPV is often used for long-term investments with uncertain cash flows. IRR is often used for shorter-term investments with less uncertain cash flows. PBP is often used for investments with high upfront costs and relatively predictable cash flows. It is important to use multiple capital budgeting techniques to evaluate an investment project. This will help to ensure that the investment decision is made on sound financial grounds.

Sample Answer Capital budgeting techniques are used to evaluate the financial feasibility of investment projects. The most important capital budgeting techniques are:

• Net present value (NPV): NPV is the difference between the present value of the future cash flows from an investment and the initial cost of the investment. An investment is considered to be worthwhile if the NPV is positive.
• Internal rate of return (IRR): IRR is the discount rate that makes the NPV of an investment equal to zero. An investment is considered to be worthwhile if the IRR is greater than the company's cost of capital.
• Payback period (PBP): PBP is the number of years it takes for an investment to generate enough cash flow to recover its initial cost. An investment is considered to be worthwhile if the PBP is less than a predetermined number of years.