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Capital Budgeting Techniques - NP, PI, IRR and Payback

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Explore the capital budgeting techniques - NP, PI, IRR, and Payback. Compare and contrast each of the techniques with an emphasis on comparative strengths and weaknesses. Be sure to show you understand how each is applied and used in capital budgeting decisions.

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This solution explains.Capital Budgeting Techniques The sources used are also included in the solution.

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The main advantage of NP or the net present value method is that it says whether the investment will increase the firm's value. Also, the net present value considers the time value of money and focuses on cash flows. It also considers the risk of future cash flows.

The main disadvantage of the net present value method is its dependence on discount rates. A change in discount rates can change the results of the calculation. Also, it is difficult to assess the risk throughout the time period as risk changes. Another disadvantage is that the net present value method expresses the value in terms of money (dollars) and not as a percent. The estimate of the cost of capital may not be accurate and the value of net present value is affected. ...

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