The subject of capital budgeting generally encompasses a significant percentage of any beginning finance course with net present value (NPV) often receiving the most attention. Even after this substantial time allotment, critical assumptions and comparisons of the different techniques (such as payback period, discounted payback period, NPV and IRR) are frequently glossed over due to time constraints. Consequently, the goal of this paper is to present these non-NPV techniques in a manner that allows the beginning finance student to expeditiously see the intuition, inherent assumptions, and any connection with the more popular NPV calculation. A small portion of this paper may be more applicable to slightly more advanced finance students and can be introduced at the instructor's discretion. Further, the lesson plan takes advantage of Excel to provide a visual presentation of how a given technique is executed (the Excel templates are also appropriate for assignments).
Copyright © 2006 Financial Education Association. This article first appeared in Journal of Financial Education 32 (Summer 2006): 78-89.
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Arnold, Tom, and Terry D. Nixon. "Adding Depth to the Discussion of Capital Budgeting Techniques." Journal of Financial Education 32 (Summer 2006): 78-89.