Question

ESSAY TOPIC:

Topic: Capital Budgeting Decision Making Tools (IRR, NPV, PI, PB). What do managers and academics prefer? What are the capital budgeting practices that are followed in the industry (ie how do Managers take Capital Budgeting Decisions? Using which tool/tools mostly?) Is there a
“better” / more preferred tool according to managers & academics?

Answer 1

Capital Budgeting Decision-Making Tools:-

IRR

NPV

PI

PB

What do managers and academics prefer?

Managers would prefer

(1) An easily applied technique,

(2) Considers cash flow,

(3) Recognizes the time value of money,

(4) Fully accounts for expected risk and return, and

(5) When applied leads to higher stock prices.

What are the capital budgeting practices that are followed in the industry?

Payback is popular because it is very easy to compute and to understand and because it gives managers a rough measure of how soon they will receive intermediate cash flows from a project that they could potentially invest in other projects.