^Capital Budgeting Methods - Page 1 of 2 CAPITAL BUDGETING...

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Page 1 of 2 CAPITAL BUDGETING METHODS P AYBACK (PB) – the expected number of years required to recover the original investment. Does not measure profitability … just how long to recoup investment a measure of the project’s liquidity Valid when Investment is in a very high risk environment Cash needs to be replaced within a specified period for investment in another project Computed: PB = n where sum of cumulative cash flows = 0 Discounted Cash Flow methods (Net Present Value and Internal Rate of Return) Essentially, compound interest methodology What is $1, n periods in the future, worth today at i interest rate? This is called ‘discounting’. All future cash flows are ‘discounted’ to the Period n = 0 , when the initial investment (cash out-flow) is made Based on two assumptions: 1. A world of certainty – the predicted cash inflows and outflows will occur at the times specified. 2.
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^Capital Budgeting Methods - Page 1 of 2 CAPITAL BUDGETING...

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