Practice capital budgeting including NPV, IRR, payback period, and profitability index. Free questions with step-by-step calculations and detailed explanations.
Start practising now — it's free Read study guidesCapital budgeting evaluates and selects long-term investments consistent with maximising shareholder value. NPV is the theoretically correct tool — it calculates the present value of expected future cash flows, subtracts the initial investment, and tells you how much value the project creates in today's dollars.
Accept projects with positive NPV; reject those with negative NPV. IRR is the discount rate that makes NPV equal zero — accept when IRR exceeds the cost of capital. For mutually exclusive projects, always use NPV. The payback period measures how quickly the initial investment is recovered but ignores time value and cash flows beyond the payback date.
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