Describe the three commonly used capital budgeting techniques

What will be an ideal response?

Answer: The three commonly used capital budgeting techniques are: 1. Payback period. The payback period is the number of years required for the net savings to equal the initial cost of the investment. The project with the shortest payback period is usually selected. 2. Net present value (NPV). All estimated future cash flows are discounted back to the present, using a discount rate that reflects the time value of money. The initial outlay costs are deducted from the discounted cash flows to obtain the net present value (NPV). A positive NPV indicates the alternative is economically feasible. The highest positive NPV is usually selected. 3. Internal rate of return (IRR). The internal rate of return (IRR) is the effective interest rate that results in an NPV of zero. A project's IRR is compared with a minimum acceptable rate to determine acceptance or rejection. The proposal with the highest IRR is usually selected.