Question

Short Answer Question

What relevant information is provided with each capital budgeting method?

• Payback Period
• Discounted Payback Period
• Net Present Value
• Internal Rate of Return

Answer 1

a) Payback period:- This capital budgeting method tells us about the time, the project would take to recover its initial investment. It does not take into consideration the time value of money.

b) Discounted payback period:- This method fills in the disadvantage of payback period. It is the same as payback period, but it also takes into consideration time value of money. The Discounted payback period is always more than payback period.

C) Net present value:- This method is the most superior method of capital budgeting. It uses the cashflow generated from the project , to find out the present value of the future cashflows , to come to a decision regarding taking up the project.

D) IRR:- This metric is used to check the profitability of a potential project. It is the discount rate at which Net present value will be equal to zero.