PDF Notes: Capital Budgeting 2026

What is capital budgeting?

It identifies and selects long-term investments for a firm.

Why is capital budgeting important?

It drives profitable growth and sustains future returns.

What are relevant cash flows?

Cash flows that arise from a project and occur in the future.

How does the payback period method evaluate projects?

It measures the time required to recover the investment cost.

What is the NPV decision rule?

Accept projects with NPV greater than zero.

What distinguishes independent projects from mutually exclusive projects?

Independent projects can be undertaken simultaneously; mutually exclusive cannot.

What does the internal rate of return (IRR) indicate?

The discount rate that makes the NPV of a project zero.

What is the modified internal rate of return (MIRR)?

It assumes cash flows are reinvested at the WACC.

What is the profitability index (PI)?

It measures the return of a project relative to its cost.

What are the advantages of using NPV?

It considers all cash flows and the time value of money.

What is a key disadvantage of the accounting rate of return (ARR)?

It ignores cash flow and time value of money.

How does inflation affect capital budgeting decisions?

It impacts the real value of future cash flows.

What happens if a project has a payback period longer than the required period?

The project is typically rejected.

What is the role of cash forecasting in capital budgeting?

It estimates cash requirements and generation over a project.

What is the impact of tax on cash flows in capital budgeting?

Cash flows must be calculated after tax effects.

What is the significance of the hurdle rate?

It reflects the riskiness of the investment.