Question

2.Management uses several capital budgeting methods in evaluating projects for possible investment. Required:Identify those methods that are more desirable from a conceptual standpoint, and briefly explain what features these methods have that make them more desirable than other methods. Also identify the least desirable method and explain its major weaknesses.

Answer 1

From the conceptual standpoint the discounted cashflow methods(net present value and internal rate of return) are considered more desirable because they consider both the estimated cashflows and time value of money the time value of money is critical because of the long term impact of capital budgeting decisions capital budgeting approaches which do not consider the time value of money include annual rate of return and cash payback the cash payback method is least desirable because it also ignores expected profitability of the project