The two most commonly used methods of capital budgeting analysis are the A. internal rate of...

The two most commonly used methods of capital budgeting analysis are the

A. internal rate of return and net present value methods.

B. net present value and payback methods.

C. profitability index and the internal rate of return methods.

D. net present value and discounted payback methods.

E. average accounting return and discounted payback methods.

Solutions

Expert Solution

The answer is Option A.

Internal Rate of Return and Net Present Value Methods

NPV (Net Present value) Method is one of the most popular methods used for capital budgeting decisions. In this method, cash flows received in the future are discounted with the required rate to determine the present value. This present value is compared with the cost of the project. It the present value is more than the cost of the investment, then the proposal is accepted. It helps in calculating returns in absolute terms. It helps in solving capital rationing problems. It considers the wealth maximisation aspect too. IRR method helps us in calculating the rate which is internal to a given project for discounting various cash flows accruing from a project. It is the rate which equates the present value of cash inflows to the present value of cash outflows. Projects are accepted when IRR is greater than or equal to the minimum rate of return.

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