In: Accounting
Discuss the three decision tools used to analyze capital budgeting projects. What are the advantages and disadvantages of each tool?
Answer :
The most common decision tools used to analyze capital budgeting projects are :
1. Payback period :
Payback period is simply a calculation of how long it takes to get original investment back. It is a amount of time which it takes to recover the cost of investment.
Advantages :
Disadvantages :
2. Net Present Value
NPV is the difference between present value of cash inflows and cash outflow over a period of time. It is use to analyze the profitability of capital budgeting projects.
Advantages :
Disadvantages :
3. Internal Rate of Return
Internal Rate of Return is a discount rate which makes net present value of all cash flows equal to zero. It is a simpler variation of net present value method.
Advantages :
Disadvantages :