Chapter 23 : Capital Budgeting Methodology: The Financial ...
Capital Budgeting Methodology: The Financial Analysis Stage
LEARNING OBJECTIVES After studying this chapter, you should be able to:
1. Discuss the discounted cash flow methods, and explain the net present value (NPV), internal rate of return (IRR), and present value index (PVI) methods.
2. Discuss the nondiscounted cash flow methods, which are the payback period (PP) method and the accounting rate of return (ARR) method.
3. Describe the impact of income taxes, purchasing versus leasing, and inflation on capital budgeting financial analysis.
4. Explain how sensitivity analysis assists managers in making capital budgeting decisions.
Two types of capital budgeting financial analysis methods are covered in this chapter:
* Discounted cash flow methods
* Nondiscounted cash flow methods .
Discounted Cash Flow Methods
The main methods that managers use to financially analyze capital projects are called discounted cash flow (DCF) methods, which include the following:
* Net present value (NPV) method
* Internal rate of return (IRR) method
* Present value index (PVI) method
These methods rely on the time value of money, a concept that combines two basic principles:
* A dollar today is worth more than a dollar in the future (the...