25.5. Techniques of Capital Budgeting

Try these first

1. 1.

   What is the Payback Period?

   Hint

   It relates to how soon the investment can start generating profits.

2. 2.

   What is NPV?

   Hint

   Think of it as measuring profits in today’s money.

3. 3.

   What does Payback Period measure?

   • Time to recover initial investment
   • Total profit generated
   • Annual cash inflow

   Hint

   It relates to how soon you can start making real profits.

4. 4.

   True or False: NPV considers the time value of money.

   • True
   • False

   Hint

   Remember how future values diminish with time.

5. 5.

   A company is analyzing a project requiring an initial investment of $250,000. It will generate returns of$75,000 per year for five years. Calculate NPV, assuming a discount rate of 10%. Discuss implications if the NPV is negative.

   Hint

   Remember to discount future cash flows before making your decision.

6. 6.

   Describe a scenario where using the Payback Period could lead to poor investment decisions. Provide alternatives that could have been better.

   Hint

   Think about long-term versus short-term gains.