Answered: What are the advantages of using the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 9QTD

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What are the advantages of using the NPV method of assessing capital budgeting projects over the Pay Back Period method?

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Capital budgeting analysis is useful to know which projects are profitable and which are not. There are many techniques in capital budgeting such as NPV (net present value), PI (Profitability Index), IRR (Internal rate of return), Payback period, etc.

Net present value (NPV) is the difference between the present values of cash inflows and cash outflows. As per NPV rule, a project with positive NPV will be accepted and the project with negative NPV should be rejected.

Pay Back Period states the number of years that is taken by the project to recover the investment of the project.

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