Capital Budgeting Techniques Summary

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Capital Budgeting Techniques Summary

Capital Budgeting Techniques (Summary)
| | Decision Rule | | | |
|Method |Independent |Mutually Exclusive |Formula ffffffffffffffffffffffffffffffffffff |Advantagesffffffffff |Disadvantagesfffffffff |
|Average Accounting Return|Accept the project if the|Choose the project with | |Easy to obtain data; Simple to |Accounting numbers, not cash flows |
|(AAR) |average accounting return|the highest AAR | |calculate; Considers income over|and market values; |
| |is greater than the | | |the life of the project |Ignores TVM; arbitrary benchmarks |
| |target AAR. | | | | |
|Payback Rule |Accept projects within |Choose the project with | |Simple to estimate; Clear |Benchmark payback usually |
| |the target maximum |the shortest payback | |decision rule and simple to |arbitrary; ignores TVM; biased |
| |payback period |period. | |interpret; Biased towards |against long-term/new projects; |
| | | | |liquidity; Adjusts for |Ignores risk differences between |

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