{"id":22982,"date":"2025-08-08T17:25:49","date_gmt":"2025-08-08T17:25:49","guid":{"rendered":"https:\/\/certifeka-edu.com\/programs\/finance-for-strategic-managers-accounting-professional-certificate\/lessons\/lesson-3-comparison-of-6-captial-budgeting-methods\/"},"modified":"2025-08-08T17:42:15","modified_gmt":"2025-08-08T17:42:15","slug":"lesson-3-comparison-of-6-captial-budgeting-methods","status":"publish","type":"lesson","link":"https:\/\/certifeka-edu.com\/ar\/programs\/finance-for-strategic-managers-accounting-professional-certificate\/lessons\/lesson-3-comparison-of-6-captial-budgeting-methods\/","title":{"rendered":"Lesson 3: Comparison of 6 captial budgeting Methods"},"content":{"rendered":"
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Lesson 3: Introduction to Capital Budgeting\n<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t
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Comparison of Methods\n\n<\/h3>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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in the previous table, we will preview the 6 capital budgeting methods.<\/span><\/h5>
2 capital investments projects are presented in Table 8 for analysis<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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Payback Period Comparison <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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The Project A is a $300,000 investment that returns $100,000 per year for 5 years, The other is a $2 million investment that returns $600,000 per year for 5 years.<\/span><\/h5>
Payback Period Comparison<\/span>
Project A Payback Periods well within the five year time period.<\/span>
Project A has the shortest Payback Period of 3 years<\/span>
Project B Payback Period is only slightly longer<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t
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Discounted Payback Period Comparison <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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When the cash flows are discounted (10%) to compute a Discounted Payback Period, the time period needed to repay the investment is longer.<\/span><\/h5>

Project B now has a repayment period over 4 years in length and comes close to consuming the entire cash flows from the 5 year time period.<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t
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Net Present Value Comparison <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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The Net Present Value of Project B is $275,000 compared to only $79,000 for Project A.<\/span>
If only one investment project will be chosen and funds are unlimited, Project B is the preferred investment because it will increase the value of the company by $275,000<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t
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Profitability Index Comparison <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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Project A provides more return per $ of investment as shown with the Profitability Index ($1.26 for Project A versus $1.14 for Project B.<\/span>
So, if funds are limited, Project A will be chosen.<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t
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Internal Rate of Return Comparison Modified <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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Both projects have a high Internal Rate of Return (Project A has the highest).<\/span><\/h5>
If only 1 capital project is accepted, it’s Project A.<\/span>
Alternatively, the company may accept projects based on a Threshold Rate of Return.<\/span><\/h5>
This may involve accepting both or neither of the projects depending on the size of the Threshold Rate of Return.<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t
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Internal Rate of Return Comparison <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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When the Modified Internal Rates of Return are computed, both rates of return are lower than their corresponding Internal Rates of Return.<\/span><\/h5>

However, the rates are above the Reinvestment Rate of Return of 10%.<\/span><\/h5>
As with the Internal Rate of Return, the Project with the higher Modified Internal Rate of Return will be selected if only one project is accepted.<\/span><\/h5>

Or the modified rates may be compared to the company’s Threshold Rate of Return to determine which projects will be accepted.<\/span><\/h5>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>","protected":false},"comment_status":"open","ping_status":"closed","template":"","class_list":["post-22982","lesson","type-lesson","status-publish","hentry"],"yoast_head":"\nLesson 3: Comparison of 6 captial budgeting Methods - Certifeka-edu<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/certifeka-edu.com\/ar\/programs\/finance-for-strategic-managers-accounting-professional-certificate\/lessons\/lesson-3-comparison-of-6-captial-budgeting-methods\/\" \/>\n<meta property=\"og:locale\" content=\"ar_AR\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Lesson 3: Comparison of 6 captial budgeting Methods - 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