Profitability Index Profitability index (PI) is the ratio of investment to payoff of a suggested project. It is a useful capital budgeting technique for grading projects because it measures the value created by per unit of investment made by the investor. This technique is also known as profit investment ratio (PIR), benefit-cost ratio and value [...]

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Discounted Payback Period One of the limitations in using payback period is that it does not take into account the time value of money. Thus, future cash inflows are not discounted or adjusted for debt/equity used to undertake the project , inflation, etc. However, the discounted payback period solves this problem. It considers the time [...]

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Internal Rate of Return Internal Rate of Return is another important technique used in Capital Budgeting Analysis to access the viability of an investment proposal. This is considered to be most important alternative to Net Present Value (NPV). IRR is “The Discount rate at which the costs of investment equal to the benefits of the [...]

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Payback Period Payback period is the first formal and basic capital budgeting technique used to assess the viability of the project. It is defined as the time period required for the investment’s returns to cover its cost. Payback period is easy to apply and easy to understand technique; therefore, widely used by investors.

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How to Calculate Net Present Value using Excel: The calculation of net present value is useful when a business has to identify a viable investment opportunity. There are many ways to calculate the NPV. The simplest way is:                  By Use of NPV function in Excel: The NPV function consists of the following arguments: =NPV (Rate, [...]

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Net Present Value  Net Present Value measures the difference between present value of future cash inflows generated by a project and cash outflows during a specific period of time. With a help of net present value we can figure out an investment that is expected to generate positive cash flows.  In order to calculate net [...]

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