Question

To support growth strategies and combat competition with rivals, businesses seek external capital to further develop products and services in hopes to create new sales opportunities. Since capital investment often involves a huge money investment, longer time engagement and risks of uncertainties, any decision shall not be taken lightly and shall be carefully evaluated before putting money to start a long-term project. The goal is to ultimately make the right accept/reject decision.

Briefly describe (not define) the six models of a capital budgeting decision, which are typically defined as a 'go or no-go' decision. These are -

1. Payback period (standard)
2. Discounted payback period (modified from payback period)
3. Net present value (NPV) (standard)
4. Internal rate of return (IRR) (standard)
5. Modified internal rate of return (MIRR) (modified from IRR)
6. Profitability index (PI) (modified from NPV)

In reviewing these, which one(s) is appropriate for small projects and which one(s) is appropriate for larger projects?

Which criteria and techniques do you consider the most useful? Please explain

Please choose one of these models and provide an example by showing the model's calculation in action.

Answer 1