Atchison_D_M5_A2 FIN - Capital Budgeting has many priorities in a firm when it comes to budgeting decisions The first task is to determine if the

Atchison_D_M5_A2 FIN - Capital Budgeting has many...

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Capital Budgeting has many priorities in a firm when it comes to budgeting decisions. The first task is to determine if the project will be profitable. The Net Present Value ( NPV), Internal Rate of Return (IRR), and payback period ( PB) are the most profitable. All three of these would result in the same decision of which is more profitable. The decisions will come down to the managements preference. The reason we might see issues between them is because of timing and cash flows. Some of the advantages of the Payback method include simplicity of calculations. Payback method is very easy to use. On the downside of the simplicity, it may draw an incorrect result. The payback method focuses on quick returns on invested funds so they can be used elsewhere. It is also very easy to do and understand. Some of the disadvantages of using the PM is they do not consider post-payback cash flows. They do not consider time value of money. The payback method also does not thoroughly consider the risks.

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