Chapter 26, Problem 9QC

To determine

Introduction:

Payback Period: Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project. The formula to calculate the Payback period is as follows:

  $PaybackPeriod=\frac{InitialInvestment}{AnnualCash\inf low}$

ARR: Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.

The formula to calculate ARR is as follows:

  $ARR=\frac{AverageAccountingprofits}{AverageInvestment}$

NPV: Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

  $NPV= Presentvalueofcashinflows–Presentvalueofcashoutflows$

Post-Audit method: Post-Audit method is used to evaluate the budget after the budget time to check its performance.

To Choose: The most reliable method of capital budgeting decisions.