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Understanding Capital Budgeting Techniques for Investment Analysis

Capital budgeting involves various analysis methods like Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, Profitability Index (PI), Modified Internal Rate of Return (MIRR), and Equivalent Annual Annuity (EAA) to assess the viability of long-term investment projects. Each method offers unique insights into the financial feasibility of investments, considering factors such as cash flows, time value of money, and profitability.

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Understanding Capital Budgeting Techniques for Investment Analysis

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  1. TECHNIQUES OF CAPITAL BUDGETING

  2. There are several capital budgeting analysis methods that can be used to determine the economic feasibility of a capital investment. They include the Payback Period, Discounted Payment Period, Profitability Index, Internal Rate of Return, and Modified Internal Rate of Return. Net Present Value,

  3. TECHNIQUES OF CAPITAL BUDGETING Businesses can use several types of capital budgeting methods to evaluate and select long-term investment projects. 1. Net Present Value (NPV) This method compares the present value of a project’s cash inflows to the present value of its cash outflows, taking into account the time value of money. 2. Internal Rate of Return (IRR) IRR is the discount rate at which the present value of a project’s cash inflows equals the present value of its cash outflows. It is a measure of the project’s profitability.

  4. TECHNIQUES OF CAPITAL BUDGETING 3. Payback Period This method calculates the time it takes for a project to generate enough cash inflows to recover the initial investment. 4. Profitability Index (PI) PI compares the present value of a project’s cash inflows to the initial investment. A PI greater than 1 indicates that the project is profitable.

  5. TECHNIQUES OF CAPITAL BUDGETING 5. Modified Internal Rate of Return (MIRR) MIRR is a variation of IRR that assumes that the project’s cash inflows are reinvested at a predetermined rate. 6. EquivalentAnnualAnnuity (EAA) EAA calculates the annual cash inflows that a project would generate if it were an annuity over its life. Each of these methods has its advantages and disadvantages, and businesses may use a combination of methods to evaluate and select investments.

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