**Simple and compound interest**

# Capital budgeting techniques

### (Explanations)

**Learning objectives:**

- Explain the difference between simple and compound interest.
- Explain the concept of time value of money.
- Compute the present value of a single sum and an annuity.
- Analyze investment projects using major capital budgeting techniques like net present value, internal rate of return, payback period and accounting rate of return.
- Explain the concept of after-tax cost, after-tax benefit and after-tax cash flow.
- Explain how income tax impacts the computation of net present value of a project.
- Explain the procedure of capital rationing.

**Number of pages:** 9

**Approximate time required:** 3 – 4 hours

**Present value of a single payment in future**

**Present value of an annuity**

**Net present value method**

**Internal rate of return method**

**Payback method**

**Accounting rate of return method**

**Impact of income tax on capital budgeting decisions**

**Capital rationing process**

**Present value of $1 table**

**Present value of an annuity of $1 in arrears table**

**Future value of $1 table**

**Future value of an annuity of $1 in arrears**

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