Investment Decisions & Techniques

1. Capital Budgeting Techniques

  • Non-Discounted Techniques:
    • Payback Period: Time required to recover the initial project outlay.
    • Accounting Rate of Return (ARR): Average accounting profit divided by average investment.
  • Discounted Techniques:
    • Net Present Value (NPV): Sum of present values of cash inflows minus cash outflows. Accept if NPV>0NPV > 0.
    • Internal Rate of Return (IRR): The discount rate where NPV=0NPV = 0.

2. Cost of Capital

The minimum return a company must earn on its projects to maintain market value and satisfy its investors.