CORPORATE

FINANCE
Quynh Trang Phan
 2

CHAPTER 6
CAPITAL
BUDGETING
OUTLINE
Net present value
Payback rule
Discounted payback
Average accounting return
Internal rate of return
Profitability index
NET PRESENT VALUE
Cash flow from project

Discount rate: 15%, NPV?

NET PRESENT VALUE
An investment should be accepted
if the net present value is positive
and rejected if it is negative.
PAYBACK PERIODS
PAYBACK RULE
An investment is acceptable if
its calculated payback period
is less than
some prespecified number of
years.
DISCOUNTED PAYBACK
An investment is acceptable
if its discounted payback is
less than some prespecified
number of years.
COMPARISON
AVERAGE ACCOUNTING
RETURN

A project is acceptable if its average

accounting return exceeds a target average
accounting return.
INTERNAL RATE OF RETURN

An investment is acceptable if the

IRR exceeds the required return. It
should be rejected otherwise.

The IRR on an investment is the

required return that results in a
zero NPV when it is used as the
discount rate.
PROFITABILITY INDEX

Present value of future cash flow

initial investment
TERM STRUCTURE 13