1.40 Problems with Capital Budgeting Methods (Summary)
TVM: This budgeting method includes the time value of money.
Later CFs: Cash flows after payback are considered.
PS: The project’s relative scale of its cash flows are evaluated
ROR: The method provides for a rate of return calculation.
Reinv. Assumption: This method does – or does not – embody a “redundancy” problem.
| Capital Budgeting Method | Rule of Thumb | Accounts for TVM | Accounts for Later Cash Flows | Provides for ROR Measure | Accounts for Project Scale (PS) | Reinvest. Assumption |
| Payback Method | ||||||
| Discounted Payback Method | ||||||
| Net Present Value (NPV) | ||||||
| Profitability Index | ||||||
| Internal Rate of Return | ||||||
| Modified Internal Rate of Return (MIRR) |
Note:
The foregoing analysis assumes all cash flows are certain. What about risk? Can anyone be certain that the projections are correct?