Net Present Value and

Other Investment
Criteria
Reniza Helena Putri, S.E., M.Si
 In Chapter 1, we saw that increasing the value of the stock in a company is
the goal of financial management. Thus, what we need to know is how to tell
whether a particular investment will achieve that or not. This chapter
considers a variety of techniques that are used in practice for this purpose.
 Capital Budgeting Decision

What fixed assets should we buy?

The process of allocating or budgeting capital is usually more involved than just deciding whether to
buy a particular fixed asset. We frequently face broader issues like whether we should launch a new
product or enter a new market.
Decisions such as these determine the nature of a firm’s operations and products for years to come,
primarily because fixed asset investments are generally long-lived and not easily reversed once they are
made.

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 Strategic Asset Allocation
What services will we offer or what will we sell?

In what markets will we compete?

What new products will we introduce?

The answer to any of these questions will require that the firm commit its scarce
and valuable capital to certain types of assets. As a result, all of these strategic
issues fall under the general heading of capital budgeting.

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 Potential Business Investments

• Any firm possesses a huge number of possible

investments.
Investment • Each possible investment is an option available to the
firm.
• Some options are valuable and some are not.
• The essence of successful financial management is
learning to identify which are which.

With this in mind, the goal in this chapter is to introduce

you to the techniques used to analyze potential business
ventures to decide which are worth undertaking.

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 Techniques to Evaluate the Proposed
Investments

Net Present Value (NPV)

Internal Rate of Return (IRR)
Payback Period
Modified Internal Rate of Return
(MIRR)
Discounted Payback Period
Profitability Index (PI)
Average Accounting Return
(ARR)

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