Financial Management, 12th Edition by Pearson

CHAPTER 8

Capital Budgeting Decisions

LEARNING OBJECTIVES

• Explain the nature and importance of investment decisions.
• Explain the methods of calculating the net present value (NPV), internal rate of return (IRR) and profitability index.
• Show the implications of net present value (NPV) and internal rate of return (IRR).
• Describe payback and accounting rate of return and their computation.
• Illustrate the computation of the discounted payback and profitability index.
• Compare and contrast NPV and IRR.
• Explain the controversy regarding reinvestment ­assumption and the calculation of MIRR.

INTRODUCTION

An efficient allocation of capital is the most important finance function in modern times. It involves decisions to commit the firm’s funds to ...