1.40 Problems with Capital Budgeting Methods (Summary) 

TVM: This budgeting method includes the time value of money.

Later CFs: Cash flows after payback are considered.

PS: The project’s relative scale of its cash flows are evaluated

ROR: The method provides for a rate of return calculation.

Reinv. Assumption: This method does – or does not – embody a “redundancy” problem.


Capital Budgeting Method Rule of Thumb Accounts for TVM Accounts for Later Cash Flows Provides for ROR Measure  Accounts for Project Scale (PS) Reinvest. Assumption
Payback Method
Discounted Payback Method
Net Present Value (NPV)
Profitability Index
Internal Rate of Return
Modified Internal Rate of Return (MIRR)


The foregoing analysis assumes all cash flows are certain. What about risk? Can anyone be certain that the projections are correct? 




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Corporate Finance Copyright © 2023 by Kenneth S. Bigel is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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