# Capital Budgeting Measurement Criteria

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Capital Budgeting Measurement Criteria U05a1 Carla Hagood 1. Describe the Net Present Value (NPV) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using NPV? The NPV determines the monetary increase that can be expected from an investment. It will tell if the return will be above or below the needed amount to complete a project. The NPV fwill show differences of expected cash flow when comparing 2 projects. The acceptable benchmark includes all cash flows, cash coming in and being spent. A positive side is that the NPV is a statistic not a ratio, it is used to determine if a single project is worth doing as well as choosing between different projects. The downside is that it allows us to see the effect on the money needed to complete the projects as well. It also takes time to completion and size of the project into factor. If someone is uninformed of this fact they may try to factor in those costs that are already included. 2. What is the payback period statistic? What is the acceptance benchmark when using the payback period statistic? This is how long it takes to receive back the money of an investment. It does not use the time value of money, it does not work with variables of cash flow. It is a good choice when an investor needs their return in a certain time period. The payback period is very easily computed. The benchmark is not a constant value and does not have a required rate of return nor is there another input, but is based on how long until the investors need their investment returned. 3. Describe the Internal Rate of Return (IRR) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using IRR? This is the most favored method in use, it works well in situations where cash flows are considered to be normal and