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What are the various financial tools used to evaluate capital projects?

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What are the various financial tools used to evaluate capital projects?

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Solution Summary

Tutorial gives you the decision rules and about one page of commentary to guide you. Two references.

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The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.

The various financial tools used are:

Net present Value (NPV), the Payback Rule, the Discounted Payback, the Internal Rate of Return (IRR), MIRR and the PI). These procedures will help rank the projects from the greatest investment to the worst.

First, the most important concept of evaluating these investments is the NPV. NPV is defined as the difference between an investment's market value and its cost. It is only a good investment if it makes money for the company so a positive NPV will be needed. The projects can be ranked from the most positive NPV to the lowest to determine profitability. This quantitative ranking method is the best to use ...

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