When evaluating capital budgeting projects, it is important to be able to compare alternatives using an objective yardstick, regardless of the pattern of the cashflows that result from each alternative. Net present value (NPV) is generally agreed to be the preferred model for evaluating projects. But, while focusing significantly on discounted cashflow analysis, such as NPV, this tutorial also examines alternative techniques such as the accounting rate of return and the payback/discounted payback methodology. Although not as theoretically sound as NPV, these models nonetheless are still widely-used today, often in conjunction with NPV analysis.

Objectives
On completion you will be able to:

• Define capital investment and understand how the cashflows of an investment project differ from its accounting profits
• Calculate the accounting rate of return and appreciate its deficiencies
• Use both the payback and discounted payback methods to evaluate an investment decision and identify the problems with these methods
• Appreciate why discounted cashflow is the preferred investment appraisal technique for most corporations