Question

Which of the following capital budgeting techniques consider the cost of capital?

(1) Net Present Value

(2) Internal Rate of Return

(3) Profitability Index

(4) Payback Period

(5) Discounted Payback Period

Question 11 options:

	(1) and (2) and (3) and (5)
	(1) and (2)
	(1)
	(1) and (2) and (3)

Answer 1

1) Net present value = Present value of cash inflows - Initial investment where Present value of cash inflows is the discounted value of cash to its present values using cost of capital.

2) Internal rate of return, If cost of capital is less than IRR, project to be selected and if it is less then project to be rejected. So, it is used in decision making

3) Profitability Index = Present value of cash inflows / Initial Investment

4) Pay back period, ignores cost of capital

5) Discounted payback period considers the cost of capital

So, Option 1, 2, 3, 5 considers the cost of capital