The document discusses various capital budgeting techniques for evaluating investment projects, including net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, and profitability index. It provides examples of calculating each measure and outlines their basic rules. NPV is presented as the preferred method since it considers the time value of money and risk. Other methods like payback period are seen as less rigorous but still useful for measuring aspects like liquidity.

3. T9.2 NPV Illustrated (concluded) 0 1 2 Initial outlay ($1,100) Revenues $1,000 Expenses 500 Cash flow $500 Revenues $2,000 Expenses 1,000 Cash flow $1,000 – $1,100.00 +454.55 +826.45 +$ 181.00 1 $500 x 1.10 1 $1,000 x 1.10 2 NPV

12. T9.9 Net Present Value Profile Year Cash flow 0 – $275 1 100 2 100 3 100 4 100 Discount rate 2% 6% 10% 14% 18% 120 100 80 60 40 20 Net present value 0 – 20 – 40 22% IRR

16. T9.10 Multiple Rates of Return (concluded) $0.06 $0.04 $0.02 $0.00 ($0.02) NPV ($0.04) ($0.06) ($0.08) 0.2 0.28 0.36 0.44 0.52 0.6 0.68 IRR = 1/4 IRR = 1/3 IRR = 3/7 IRR = 2/3 Discount rate

17. T9.11 IRR, NPV, and Mutually Exclusive Projects Discount rate 2% 6% 10% 14% 18% 60 40 20 0 – 20 – 40 Net present value – 60 – 80 – 100 22% IRR A IRR B 0 140 120 100 80 160 Year 0 1 2 3 4 Project A: – $350 50 100 150 200 Project B: – $250 125 100 75 50 26% Crossover Point

22. T9.14 The Practice of Capital Budgeting