Monday, February 8, 2010


Capital Budgeting Methods in Practice

In the study of the capital budgeting practices of fourteen medium to large size companies, it was found that all companies, except one, used a payback. With payback and/or other techniques, about two-thirds of companies used internal rate of return (IRR) and about two-fifths net present value (NPV). Internal rate of return (IRR) was found to be second most popular method.

The reasons for the popularity of payback in order of significance were stated to be its simplicity to use and understand its emphasis on the early recovery of investment and focus on risk.

It was also found that one-third of companies always insisted on the computation of payback for all projects, one-third for majority of projects and remaining for some of the projects. For about two-thirds of companies’ standard payback ranged between three and five years.

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