Week 8 Capital Budgeting Decision Rules

Week 8: Lecture

Capital Budgeting Decision Rules

Once you have the forecast of the net cash flows, the next step in the capital budgeting process is to evaluate them using a number of Capital Budgeting Decision Rules These rules by which you decide whether or not the proposed project is desirable and should be adopted by the firm, or if it should be rejected.

On the following pages is a survey of a number of the most popular decision rules:

Payback Period Method (PB)
Breakeven Analysis
Breakeven Chart
Net Present Value (NPV) Method
Internal Rate of Return (IRR)

We will not emphasize the following evaluative tools:

Discounted Payback (DPB)
Modified Internal Rate of Return (MIRR)
Profitability Index (PI)