**Capital budgeting process**

# 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

**Capital budgeting decisions**

**Initial investment in capital budgeting**

**Net present value (NPV) method**

**Internal rate of return method**

**Payback method**

**Discounted payback method**

**Accounting rate of return method**

**Net present value (NPV) profile**

**Profitability index (PI)**

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

**Depreciation tax shield**

**Interest tax shield**

**Capital rationing process**

**Normal or conventional cash flow**

**Simple and compound interest**

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

**Present value of an annuity (PVOA)**

**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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