Capital Budgeting Techniques - Quick
Summary Sheet
1. Introduction
Capital Budgeting is the process of evaluating and selecting long-term investments that
are consistent with the firm's goal of maximizing owner wealth.
2. Main Techniques (The "Big Three")
Technique Meaning Decision Rule
Payback Period Time taken to recover the Accept If Payback < Target
initial investment. Period.
NPV (Net Present Value) Difference between PV of Accept if NPV > 0.
cash inflows and outflows.
IRR (Internal Rate of Return) Discount rate that makes Accept if
NPV = 0. IRR > Cost of Capital.
3. Key Formula for students
• Payback Period:
Initial Investment
Payback =
𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤
• NPV Calculation:
𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤𝑡
NPV = ∑ [ (1+𝑟)^𝑡
]− 𝐼𝑛𝑖𝑡𝑖𝑎l Investment
(Where r = required rate of return, t = time period)
Summary Sheet
1. Introduction
Capital Budgeting is the process of evaluating and selecting long-term investments that
are consistent with the firm's goal of maximizing owner wealth.
2. Main Techniques (The "Big Three")
Technique Meaning Decision Rule
Payback Period Time taken to recover the Accept If Payback < Target
initial investment. Period.
NPV (Net Present Value) Difference between PV of Accept if NPV > 0.
cash inflows and outflows.
IRR (Internal Rate of Return) Discount rate that makes Accept if
NPV = 0. IRR > Cost of Capital.
3. Key Formula for students
• Payback Period:
Initial Investment
Payback =
𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤
• NPV Calculation:
𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤𝑡
NPV = ∑ [ (1+𝑟)^𝑡
]− 𝐼𝑛𝑖𝑡𝑖𝑎l Investment
(Where r = required rate of return, t = time period)
